Schemes of Arrangement - CSR's Demerger Effort Thwarted by Objections Regarding Its Potential Asbestos Obligations

What a great legal term of art - "scheme of arrangement." The term has multiple but related nuanced meanings and applications because "schemes" are essentially corporate law opportunities to end or alter the business life or structure of a corporation. Depending on the nation and the particualr use, schemes may have varying outcomes when used in the diverse ways that are possible in the various nations that arise from the former British Empire.

This post focuses on an attempted "scheme" under Australian corporate law. In this instance, the scheme consists of the efforts of a public company, CSR, to move forward with a "demerger" (a "spin-off"  in the US) that would split one public company  into two "more focused"  public companies. Only one of the emerging companies would, they hope, be liable for asbestos bodily injury or property damage claims that will or may arise from past ownership of a crocidolite mine and sales of various asbestos-containing products. Thus, by dividing the ompany into two peices. the proposed demerger would reduce the amount of corporate assets available to pay the current and potential future asbestos claims that arise from past business operations. The opinin explains the numbers as follows:  "In its financial statements for the half year ended 30 September 2009 CSR has recognised a provision of A$446.8 million for current and future asbestos liabilities. This comprises 10% of CSR’s total assets as at 30 September 2009 but, based on the pro forma balance sheet produced by CSR as at 30 September 2009, would comprise 18% of New CSR’s assets at that date."




To date, the scheme has not succeeded because the trial judge hearing the petition agreed with objections involving the ability to pay future asbestos claim expenses. Who were the objectors ? According to the opinion,  " The proposed capital reduction has prompted considerable interest in, and opposition to, the Scheme. This was evidenced by the Australian Securities and Investments Commission (ASIC) and a number of objectors seeking, and being given, leave to intervene in the proceeding when it first came before the Court on 17 December 2009. The matter was then adjourned to allow the objectors and ASIC time to obtain expert assistance in reviewing the Scheme. The objectors were [underlying case co-defendants ] James Hardie Industries NV and James Hardie 117 Pty Limited (together “James Hardie”), the Asbestos Injuries Compensation Fund Limited (under NSW administered winding up), AMACA Pty Limited (under NSW administered winding up) and AMABA Pty Limited (under NSW administered winding up) (together “AICF”) and the Attorney-General for the State of New South Wales (NSW). The objectors all opposed the Scheme and argued against the Court making the orders sought by CSR.  ...ASIC and the objectors were concerned only with potential prejudice to asbestos claimants, that is persons who now have, or in the future may have, a claim for compensation from CSR for injury sustained from exposure to asbestos."  The trial court opinion rejecting the scheme certainly was less enjoyable for management than a succesful  2003 scheme,
 
The CSR scheme is interesting on a comparative law basis and a social basis. Thus, in the US, companies have often enough spun off liability-laden entities without the SEC and other entities seeking to block the spin-off, and instead simply reacting later, as was done with Tronox.  In contrast, the objections here were a subject of popular media coverage as to objections of  the Australian Securities and Investment Comission, regional Australian governments, and the various James Hardie interests that arise from James Hardie entities being co-defendants in underlying asbestos cases. The objections by codefendant Hardie entities arlso are noteworthy in view of  Hardie previously undertaking  to create a foundation to manage and pay for its own asbestos litigation  and then moving from Australia to the Netehrlands as part of it's own asbestos-related scheme, a move more recently followed by Hardie moving  from the Netherlands to tax-haven  Ireland. Moreover, some of Hardie's officers and directors recently were convicted of criminal securities law violations arising from public statements on estimates of future asbestos expenses (this prior post links to the opinion/judgment) because the trial judge appears not to have believed the testimony of the directors.  And as described yesterday, Hardie and CSR apparently now are quarreling over their respective obligations in particular asbestos cases.

Another noteworthy part of the opinion revolves around certainty.  Thus, the opinion refers to a suggestion that the 2d demerger entity provide a guarantee for the entity holding the asbestos liabilities. See paragraphs 37-38.  That suggestion was rejected, and thus the trial judge wrote:  " I understand that CSR did not regard the suggestion as attractive. Its submissions in reply noted that the proposal “would significantly alter the commercial characteristics of the proposed demerger”. In particular it was said that the proposal would subject Sucrogen “to a contingent liability over which it had no effective control, which had no correlation to its business revenue and which offered no commercial return or benefit”.  Thus, CSR's response seesm to illustrate a reality I mentioned yesterday in the context of entities emerging from bankruptcy :  bankers and investors will always want and seek  a predictable free cash flow to sell at a multiple.

The other side of that coin, however, is that the court was unwilling to give the business entities the certainty they want. Why? Because past conduct created enormous uncertainties for exposed persons, and unless science can change the outcomes,  thousands of the currently uncertain individuals will in the future suffer painful deaths from mesothelioma, a point raised explicitly by counsel for the New South  Wales region. Thus, the trial judge explained: 

"There is one last issue to be addressed, namely the submissions made for NSW. Mr Oakes SC who appeared for NSW stated that from his client's point of view the central issue is:
[W]ho in the future should bear the risks if asbestos claims projections are too low, or that actual cash flow is too low because of the inherent uncertainties in long-term earnings and cash flow forecasts ... ? So the question is: should the risks be borne by the businesses that currently comprise the CSR group and, thus, indirectly by the CSR shareholders, or should the risks be borne by the current and future asbestos claimants? Our submission is the risks shouldn’t be borne by the current and future asbestos claimants ...


A final point. The opinion is frustrating because it alludes to various expert future expense predictions submitted by the parties, but does not go into detail, deeming the information confidential. As a lawyer for corporations, I understand the desires and arguments for secrecy. That said, the law develops through precedent, and it’s much harder to apply and learn from precedent when crucial facts are not on the public record and are not explicitly addressed in the opinion. Courts and companies face difficult issues ahead in trying to balance the competing considerations as to secrecy. Set out below are the statements the court did put on the record regarding the predictions of future expenses.




“Analyses of expert reports


31. It is not possible to give detailed analysis of the confidential reports, however, the flavour of the debate is reflected in submissions made on behalf of those commissioning the various reports. For example, the written submissions for ASIC contain 12 pages of detailed analysis of the actuarial material concerning asbestos liabilities and financial stress testing. The submissions analyse the CSR actuarial material including the expert reports and advice provided by Taylor Fry and Navigant, the expert reviews of that material by KPMG and Ernst & Young as well as the response of the CSR advisers. The submissions set out ASIC’s conclusions in relation to the actuarial material as follows:



First it is self evident that there is considerable uncertainty surrounding any process of actuarially assessing future asbestos liabilities. Notwithstanding that CSR ceased involvement in asbestos related activities in 1977 both [Taylor Fry] and Navigant have continually being [sic] revising their central estimates upwards from 2004 based on new information that emerges.



Second, as described above, there are limitations on the scope of the actuarial assessments which have the potential to under estimate the overall valuations.


Third, within the actuarial assessments there are significant matters of judgement over which reasonable minds may differ and which have considerable potential to adversely and materially affect the valuations. This is exemplified by the differences in professional opinion between KPMG and Taylor Fry in relation to both the central estimate and the 95th percentile estimate of the Australian liabilities.



Fourth, ASIC submits that in determining this application the Court need not embark upon the task of determining which expert is “correct” or to be preferred. Instead it should note the differences of professional opinion but, in the context of determining the application based on the approach outlined above, it should afford significant weight to the views expressed by KPMG at least so far as they affect the 95th percentile estimate provided by [Taylor Fry]. KPMG have significant expertise in the area and they have provided a detailed rationale for their opinion on these issues. Their views at least so far as they affect the 95th percentile estimates are supported by [Ernst & Young] and, in some limited respects, by Finity.


32. The submissions also analyse the financial stress testing that CSR had undertaken and the Ernst & Young review of this stress testing. The conclusion is stated as follows:

A review of the material concerning the financial analysis and stress testing undertaken by and on behalf of CSR reveals that there are a number of aspects of uncertainty surrounding such an exercise mainly:


(i) The obvious uncertainties that arise from any exercise of financial modelling the future performance of any business especially in the context of measuring its ability to meet long tail liabilities such as those that arise from asbestos use;


(ii) The limited external scrutiny of the assumptions and workings of the 5 year and 20 year financial models prepared by CSR management, the inputs to which most always primarily originate from CSR's management;


(iii) The judgements involved in identifying the various risks to the business, the relevant parameters for the “shock testing” and the exclusion of other forms of risk ...; and


(iv) The absence of any testing of the combination of a prolonged downturn and the high case estimates and the related questions of judgement as to whether it would be feasible for New CSR to respond to the various risks to the business under the shock scenarios that were stress tested.


33. CSR's submissions in reply make the following comments about the submissions made by ASIC:


In its written and oral submissions, ASIC ... sought to stress the uncertainties and limitations inherent in actuarial analyses of future events. Such a submission should not be taken too far.


By definition, any assessment of possible future events involves uncertainty and any attempt to actuarially assess such events will be subject to limitations. As the Court noted in argument, such uncertainties and limitations are equally applicable to CSR in its current structure as they are to CSR post-demerger. Provided that the advice provided to the CSR Board has been shown to be reasonable, the fact that the advice is subject to uncertainties does not warrant a conclusion that the advice should be rejected or lacks persuasive force.


Further, ... the doubts and uncertainties and the differences between the actuarial experts are of no relevance in circumstances where CSR's analysis has taken account of the full range of actuarial opinion. Cash outflows associated with the asbestos-related claims have been projected having regard to all “reasonable hypotheses”. Further, no party has sought to demonstrate a flaw in the other principal aspects of that analysis, namely the projection and “stress testing” of future cash inflows from CSR's de-merged business operations. That aspect of the analysis has been reviewed by PWC. It has also been reviewed on behalf of ASIC by [Ernst & Young] without unfavourable comment. In the light of the above, and as there is no correlation between risks attending the projected business cash inflows and the risks of under-estimation of the asbestos related cash outflows, the analysis provides a very high level of comfort that asbestos claims will be met.


ASIC's submissions should be read with this in mind. Its submissions are open to the criticisms that:


• they fail to reflect the conclusions of their own expert;


• they place undue focus on limitations and uncertainties that no actuary (including KPMG) can avoid without regard to the conclusions ultimately stated by the experts;


• they overstate the significance of the limitations and uncertainties ...


34. In addition to these criticisms CSR made detailed submissions in tabular form responding to the submissions made by AICF. Those submissions confirm that there is a genuine dispute between the experts as to the appropriate way to assess New CSR’s ability to meet future asbestos claims. The submissions made on behalf of James Hardie echoed the submissions of ASIC and AICF as well as making some additional criticisms of the provision made for New CSR to meet future asbestos claims.


35. In summary, the expert evidence presented by CSR, ASIC, and the other intervening parties brings into sharp relief the inherent uncertainty involved in any actuarial estimate of future asbestos-related claims and in particular the limitations and qualifications expressed in the actuarial reports relied on by CSR. In addition, specific issues raised by the experts retained by ASIC and AICF point to particular limitations in the material supplied by CSR’s experts in relation to future asbestos claims that cannot be reliably estimated at this time. The starting point in considering whether these flaws should lead to my not being satisfied that the provisions made in respect of asbestos-related claims following demerger are consistent with public policy or commercial morality must be:


(a) that New CSR will be the repository of all CSR's liabilities in respect of asbestos-related claims both present and future; and


(b) that it will suffer a significant reduction in the capital available to meet such claims.


36. The significance of those two factors increases with the uncertainty of the actuarial estimates and other expert opinion and is such that I cannot be satisfied that the provisions made are consistent with commercial morality or that the Scheme, if given effect, would not involve an unfair or oppressive result. Moreover, these same issues lead me to conclude that the material in the explanatory statement cannot provide adequate disclosure to CSR shareholders of New CSR's ability to meet these future liabilities. For both these reasons I have concluded that I should decline to make the orders for convening the Scheme meeting. In the circumstances, it is not necessary that I should consider the aspects of the Scheme that might otherwise be addressed at the first hearing.”

Cross Claiming Among Asbestos Defendants and Asbestos Trusts - A $ 2 Million (AU) Mesothelioma Settlement; CSR and James Hardie Provide Examples for Consideration

Pasted below are key excerpts from a February 18 Wall Street Journal Australia article by Miland Rout which provides news of a $ 2 million (AU) asbestos mesothelioma settlement for the death of a young father. The amount is news in itself.

From my vantage point, however,  the even more interesting part of the story is the assertion - assumed to be true for present purposes - that asbestos defendants CSR and James Hardie will now proceed against each other to resolve which entity should pay how much of the settlement. According to the articles's description of statements by plaintiff's counsel from Slater & Gordon, the companies apparently are no longer observing some sort of understanding or agreement on how much each should contribute.

So, what does one say about intercompany allocation battles? My personal view is that we will see more cross-claiming ahead because some companies need to transfer fault and expense to others in order to survive. In a related vein, more of the cross-claiming I think will involve claims by current tort sytem defendants against "asbestos trusts"  or foundations established by entities that have used chapter 11 (rightly or wrongly) to exit the tort system.

Why cross-claim? One reason  is that the asbestos tort system today is farcical in the sense that the most culpable defendants exited the tort system early and did so far, far too cheaply. Simply put, Manville, Unarco, Raymark, and various insulation and boiler makers (e.g. Eagle-Picher, Babcock & Wilcox), and some other "early movers," paid far too little to exit the tort system. The result? Some (not all) victims are undercompensated and many (not all) remaining tort defendants are now paying far too large a share for asbestos claims.

Why did early exits occur for too little money ? There are many reasons. In my opinion, the fundamental problem is that bankruptcy law and courts try to provide one time certainty through one time estimates of future "liability."  Why? Well, because at its core, law is all about economics and money, and Wall Street wants fast, one time answers in order to have a business unit with a predictable cash flow that can be sold for a higher number of multiples of a predictable mulitple of  EBIDA or some measure of  free cash flow. That approach may be desirable in the short term for for bankers and investors, but it's not working well for the victims or co-defendants, and so bankruptcy law is too often being used to trump all the social and economic policy efforts inherent in common law tort rules and in recent state legislative "tort reform" efforts (some of which are in some ways flawed,  but that's a different story).

Simply put, one time answers from bankruptcy courts are an idea that's been proven not to work at all well. At least to date, some but not all long-tail claiming problems (e.g environmental "contamination," asbestos litigation, chemical exposure claims) have proved to be far too unpredictable to be resolved well at one particularr moment in time. That's especially true because the future liability estimation proceedings in bankruptcy court have virtually nothing to do with science.

Want proof from sources othere than some lawyer writing on a blog? Read the Manville bankruptcy  opinions and learn that the plaintiff's bar and co-defendants failed to get 100% of Manville's stock and took far too little future cash flow from New Manville.  Also note that the first liability estimate in Manville was so low that the Manville trust was insolvent when it first opened its doors, and so it soon had to close its door and go back into into bankruptcy court for a "do over." (During the oral argument last year in the Manville/Travelers case at the Supreme Court, Justice Steven's accepted Mr. Ostrager's argument that Manville has been a "success."  When I read that comment, (see transcript at 14), I didn't know whether to laugh or cry - it simply proved how little the Justices know or understand about mass torts, and why other lawyers called the Court's opinion very "narrow" (read as meaning "advisory"),  a view I share. Far more apt, at page 12,  was  Justice Stevens' comment that the Manville appeal  was  "mysterious."  With all due respect, Chief Justice Roberts is leading theCourt in the wrong direction with his avowed intent to reach out and resolve "business cases" when, as there, the record is at best scant and unclear,  and the subject matter involves complex real world problems unfamiliar to the Justices)

Want more proof ? Read Judge Weinstein's paper confessing that courts have not done well with masss torts. Also, as to bankruptcy in particular, read this scathing indictment of the bankruptcy court "liability estimation " process.  Who wrote the indictment ?  Lawyers for W.R. Grace equity holders wrote the brief, but the meat of the indictment is in the expert witness report submitted by James Heckman,  a University of Chicago PhD econmist who won a Nobel prize for his other work in economics.  His opinion exposes most but not all of the flaws inherent in "estimates" submitted by Mark Peterson,  an expert almost always used today by the asbestos  plaintiffs.

After reading those materials, read the prior posts on this blog (e.g. here, here and here,) regarding the W.R. Grace ch. 11 settlement -  it was a fabulous outcome for Grace because it fought hard and the asbestos plaintiff's bar wanted to end the case before Grace forced Judge Fitzgerald to write an opinion applying science to law and recognizing and acting on the massive and dubious claiming practices of the not sick. Those claiming practices dominated and distorted asbestos claiming in the the early  2000s, and other eras. Moreover, those practices are relatively alive and well today in the "asbestos trust" system as the not sick have taken massive amounts of money out of the Owens-Corning trust (and others), thus using the wonders of chapter 11 law to run roughshod over tort reform laws enacted in Ohio and elsewhere that seek to block recoveries by the not sick.  (Reminder of prior disclosures - I used to represent W.R. Grace and others in asbestos litigation - my standard disclosure is here.)  Sadly, the not sick retain some power because Congress unwisely enacted section chapter 11 section 524(g) to "codify Manville" and gave veto power to the holders of 75% of the claims (regardless of the value or merit of the claims, some say.)

Also see the Quigley chapter 11 case, and the battles of a few "cancer victim" lawyers to block or limit recoveries by the not sick; some information is in this prior post but the case is one that deserves far more attention. Further, see this prior post on the GIT/Narco appeal the 3rd Circuit should be deciding soon - note especially the "silica trust" conjured up from a handful of claims.  And, finally, I'd refer you to this prior post on mass tort issues that lie ahead, and the flawed use of  futures representatives. Note especially the Plevin article linked to in that post - it details the vast and unworkable conflicts of interest that bankruptcy courts tolerate in futures representatives.

Here are the key excerpts from the WSJ article:

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Hardie seeks asbestos compo from CSR Milanda Rout From: The Australian February 18, 2010 12:00AM


AUSTRALIA'S two biggest asbestos-makers are fighting it out in court over a $2 million settlement reached with a Victorian man who contracted asbestos-related cancer as a child.

James Hardie -- now known as Amaca -- has launched proceedings against CSR to seek a contribution for the compensation after Amaca settled the case involving 48-year-old Robert Berengo in the Victorian Supreme Court this week.

***

Amaca agreed to pay the compensation claim before it reached the courtroom on Tuesday, saving Mr Berengo -- who is about to start another round of chemotherapy -- from having to go through a trial. The settlement will be paid by Amaca irrespective of its action against CSR.

The liability case, according to lawyers Slater & Gordon, is one of the first to go to trial in Victoria after the breakdown of what they call a gentlemen's agreement between the two companies to share the financial liabilities of asbestos compensation cases.

Steve Plunkett, the head of Slater & Gordon's asbestos litigation team, said that until last year, the companies had agreed to share the costs of compensation for victims who were not certain about which of the two had manufactured the asbestos products to which they were exposed.

This was believed to be based roughly on market share but details of the agreement and who withdrew from it is in dispute.

Mr Plunkett said a number of cases had been affected by this issue and he hoped the eventual judgment handed down on the split of costs between the companies would help avoid a recurrence of this situation.

Mr Berengo's lawyer, Tracy Madden, also from Slater & Gordon, said the $2m settlement from Amaca was a great result for her client. She said they claimed he was exposed to asbestos when he used to hug his father in his asbestos-clad work clothes, and when he would help his father on jobs and shake his father's painting sheets at home.

***

Neither company was prepared to comment on the case

How Often Does Manville Trust Diagnose (and Pay?) Claims 37 Years After Death ?

Today, a new example of issues that arise from secrecy in asbestos litigation. The question in short: How often do asbestos trusts diagnose claims 37 or so years after death, and how often and how much do they pay out for claims that would ordinarily be barred by statutes of limitation?

Chapter 11 asbestos cases, and asbestos trusts, are noteworthy for a penchant for secrecy. The penchant for secrecy applies even though secrecy is perhaps the greatest antithesis of due process, and was an especially detested feature of Star Camber proceedings, as described here in simple terms and here at some length in a wonderfully easy to read but thorough 2009 law review article written by Stephen Wm. Smith, a United States Magistrate Judge in the Southern District of Texas, Houston division. See "Kudzu in the Courthouse: Judgments Made in the Shade," 3 Fed. Cts. L. Rev. # 2, 177 (2009).

Judge Smith explained the problems with secrecy, at 214:

“In our common-law tradition, the exercise of judicial power is an inherently public act. A court of record, by definition, is a court that acts on the record, placing its rulings in the public domain, whether by pronouncement in open court, handwriting on a parchment roll, typing on a docket sheet, or digital key-strokes on-line. It is not merely that publicity has many virtues—promoting public confidence in courts, enhancing reliable fact-finding, and curbing judicial abuse of power. Nor is it simply that the people have already bought and paid for the right to know what their judges do with their office. Rather, it is the public record of judicial decisions that renders those decisions legitimate. Philosophers from Kant to Rawls have written treatises on why this is so, but one of our colonial forebears nailed it with only eight words: “Justice may not be done in a corner.”

How does secrecy play out in asbestos litigation ? In  many ways, and they are not all covered here.. For prior examples of asbestos trust secrecy, go here (absence of material data about Manville Trust payments to the not sick), and here (Manville Trust withdrawing data previously made public under licensing agreements).  Here's a new example that arises because of an opinion sent along by a friend out east when he enountered a new federal district court opinion that involves asbestos trusts.

According to the pro se complaint,  a Mr. Palermo worked with asbestos-contiaing products while working for Halliburton, and "[o]n June 6, 2003, Palermo was posthumously diagnosed with mesothelioma "by a tribunal of asbestos experts who were part of the Extraordinary Claims Panel of the Manville Trust." (Am. Compl. P 17.)  How odd is that? To me, it's quite odd since the complaint also alleges that Mr. Palermo had died back in 1966 of metastasis from "stomach cancer."

If true, the allegations  indicate that a diagnosis was made some 37 years after death. One may also assume a payment was made by the Manville Trust. The complaint goes to on complain - unsuccessfully - that another trust would not make a payment.

So, what does this all mean in the larger context?  It's fairly easy to think that Mr. Palermo may well have actually died of peritoneal mesothelioma due to asbestos-inhalation. And, surely there are arguments to be made for paying compensation whose deaths were wrongfully caused, regardless of the date of death, but those arguments have not succeeded when statutes of limitation are applied.  So, for purposes of social policy decision-making, one does have to wonder how often claims of some age are made, how the post-death diagnosis was made (old tissue ? medical records? narrative?), and how much money is paid out each year by the trust for claims of this ilk.


Can answers be obtained? I don't know, but will send an email off to the Manville Trust and will let you know if I hear anything back.
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Here are key excerpts from the opinion in Gail Garner v. DII Industries, 2010 U.S. Dist. LEXIS 9583 (Feb 4. 2010).

"Viewing the allegations in the amended complaint as true, the following are the relevant facts for consideration of the present motion. The decedent, Angelo Palermo ("Palermo"), was a union insulation mason for twenty-nine years from 1937 through 1966 in the construction asbestos industry. He spray coated and handled asbestos-containing products while working for one or more of the Haliburton or Harbison-Walker entities. Palermo died on April 23, 1966, at the age of 51 years. (Am. Compl. PP 14 & 34.) His death certificate listed the immediate cause of death as acute liver failure due to "metastasis cancer due to primary stomach (place of origin)." (Am. Compl. PP 11-15.)




On June 6, 2003, Palermo was posthumously diagnosed with mesothelioma "by a tribunal of asbestos experts who were part of the Extraordinary Claims Panel of the Mansville Trust." (Am. Compl. P 17.) On April 4, 2006, Plaintiff filed a claim with DII Industries, LLC, and, the following day, filed a claim with the DII Trust, with regard to her father's death. Defendants eventually rejected the claims, and a pro bono evaluator confirmed Defendants' denial. (Am. Compl. PP 18-27.) (emphasis added)

Mass Tort Battles Ahead - New Thinking and Arguments, UK Report Endorses Litigation Funding, and Phillip Morris Hires David Bernick from K & E

I'm setting aside James Hardie and Australia for a few days. News on Friday provides a great springboard for some comments in the same general area of what's new in mass tort resolution thinking, and some points related to corporate actions to cope with/avoid/limit the corporate damage from mass tort claims.
_____________________________________________________________________________

How does big tobacco admit it  faces massive global tort warfare ahead ? By hiring David Bernick away from Kirkland & Ellis, as was announced Friday - see article at the bottom.

Why is hiring Mr. Bernick so telling ? Look at what he has done.  K &  E  teams headed up by Mr. Bernick have often (but not always) won some of the most  difficult battles in mass tort litigation, and have included various creative and massive efforts to buy time and/or survival for corporate defendants. For example, his team successfully defended Grace executives in a criminal trial involving asbestos regulations and "tremolite contamination" in mined products; that trial would have been easy to lose due to asbestos hysteria. The team also was winning the W. R. Grace asbestos bankruptcy trial by thoroughly discrediting the seamy side of asbestos claiming by the not sick, and so they capitalized by reaching a fantastic mid-trial settlement in the  bankruptcy. Bernick and others  also did a business-saving (albeit unconstitutional) deal  in chapter 11 to free Asea Brown (ABB ) from its Combustion Engineering asbestos liabilities, and obtained that result despite the stench from ABB's   $ 20 million payment to plaintiff's counsel.  Mr. Bernick and others also undertook an ill-fated but brilliant effort on behalf of car companies to use the Federal-Mogul bankruptcy to convene one massive  Daubert hearing in federal court regarding whether brake linings with asbestos actually cause cancers. Even though the latter effort did not succeed on the merits; it bought much needed time for car companies at a time when asbestos litigation was at one of its most frenzied points.

One cannot help but wonder the price. If Mr. Bernick can do for PM what he has done for other entities, the financial dividend for PM shareholders will be huge. Indeed, Mr. Bernick actually will add real value to the bottom line with actual creative thinking and hard work. That said, perpetuating smoking is anything but the work of angels.

What issues are out there to keep Mr. Bernick busy and challenged ? A recent example arises from the disastrous $294 million verdict entered last fall in one of the thousands of pending post-Engle tobacco cases that are being  set for trials in Florida.  If one took that verdict into bankruptcy court and handed it to the "liability estimators," they could generate a future liability range of numbers that probably would include numbers in the trillions of dollars. Those numbers also could be offered in bankruptcy court to support fraudulent conveyance claims involving various corporate moves by tobacco companies. Recall, for example, that Asarco was hit this past year with a $ 6 billion dollar bankruptcy court judgment based on fraudulent conveyance claims tied to corporate activities undertaken in anticipation of tort and environmental claims.

That said, the bankruptcy liability estimation process is not even close to scientific, as Mr. Bernick well knows. Indeed, the Grace bankruptcy included one of the strongest indictments issued to date regarding the lack science and due process in bankruptcy proceedings, That indictment is set out in the testimony of Professor Heckman,  a University of Chicago economist and Nobel prize winner, as described  in item 4 of this prior post.

Meanwhile, there is global cigarette litigation. In Nigeria, the tobacco companies are the subject of $ 45 billion government cost recovery claims, as described, for example, here and here. And, as noted on Saturday, there have even been tobacco claims in Japan, which are not noteworthy for any success but are note worthy for the statistics regarding the continuing smoking patterns in Asia.

Perhaps most significantly, the tobacco industry recently suffered a resounding loss as the Massachusetts Supreme Court endorsed in sweeping terms a medical monitoring class action case against tobacco companies. Due to Congressional hearings and the tobacco settlements, it's very plain that the cigarette manufacturing industry very closely follows science, and so its senior executives undoubtedly are aware of the indicators that their companies soon enough will face a wave of  expensive medical monitoring and therapy claims arising from new scientific discoveries. Soon enough, it will be routine to provide effective screening examinations to find cancers when they are still microscopic. Incredible new devices and techniques will be used to create innovative therapies that will be developed to "cure" or manage the tumors, all at some significant amount of expense. See generally the many papers of Professor Gary Marchant, most of which are collected on his law school's website at the page which is here. Those developments will make it practical for plaintiff's lawyers to bring claims on behalf of persons in developing countries for which the opportunity for expensive life-saving treatment will create enough economic value to incentivize litigating cases that will have significant emotional appeal to any judge or jury.


My bet? Mr. Bernick's will architect and oversee an effective defense across the broad range of pending cases, all while planning for future efforts to obtain absurdly favorable settlements that promote continuing tobacco use by sharing revenues with governments and lawyers, not to mention, litigation funders, to produce securitized cash flows. The settlement also produced ancillary litigation over access to information from state attorney's general on why and how they settled. Certainly Mr. Bernick is well suited by experience to lead PM through the issues ahead.

Mr. Bernick will have plenty of new challenges because more and more commentators are speaking out on the myriad problems with the handling of mass tort claims. Indeed, new commentators are emerging. Commentators include Prof. Erichson on "The Trouble With All or Nothing Settlements" and others who last year spoke on whether more mass tort claims need to be litigated instead of settled. Prof. Burch wrote a post this past Friday on Prof. Redish's new book arguing that many mass tort class action procedures are unconstitutional (an issue I've been litigating and arguing since the late 1980s.) She also links to a summary of contra papers by Prof. Issacharoff, who also is a paid partisan and advocate in asbestos litigation, including (among others) the THAN bankruptcy (click by the first screen and then you should land at the page for In re T H Agriculture & Nutrition, L.L.C., Case No. 08-14692 (REG). The THAN case is the asbestos bankruptcy that produced a declaration from an asbestos  plaintiff's lawyer regarding his understandings from chapter 11 plan negotiations regarding his firm's clients being paid an average of over 700k per claimant for future claims against the THAN trust.

Challenges also will arise due to commentary and new thoughts from overseas. Prof. Burch wrote this recent cogent post summarizing a new report from the UK on tort claiming. To tease you to go read more, here are two key excerpts from the post summary:

"Of additional import, the final report recommends that solicitors and barristers should be allowed to enter into contingency fee arrangements, which are currently prohibited. Before entering into such an arrangement, the report recommends that claimants receive independent advice. It also suggests capping the fees at 25%.



Finally, the report recommends making third-party funding available to personal injury claimants (including those involved in collective actions). It defines third party funding as "The funding of litigation by a party who has no pre-existing interest in the litigation, usually on the basis that (i) the funder will be paid out of the proceeds of any amounts recovered as a consequence of the litigation, often as a percentage of the recovery sum; and (ii) the funder is not entitled to payment should the claim fail." (Final Report at p. 17). Very interesting."

UK corporate and insurance company lawyers issued a January 19 report she links to; here's their bottom line:

"If Jackson LJ's recommendations are passed into law, it seems safe to predict that they will lead to an increase in the number of collective actions seeking damages for personal injury. In particular, group claims against the manufacturers of allegedly defective products, which are no longer routinely funded by legal aid as they were in the 1980s and 1990s, are likely to become more common. Claimants with an arguable claim of this type would generally be able to proceed under a contingency fee, CFA or third-party funding arrangement without the spectre of possibly having to pay, out of their own pockets, either their own lawyers' fees or the costs of their opponent.

Costs shifting would remain in place for most types of collective action, such as those involving claims for anti-competitive behaviour or consumers' claims for economic loss. In these cases, the loser-pays rule would remain a significant disincentive to claimants considering a group action and would protect defendants against frivolous or speculative lawsuits.

The big question now is whether these reforms will be implemented. Jackson LJ appears to hold the view that his recommendations, which he describes as "a coherent package of interlocking reforms", should not be viewed individually but as a comprehensive set of proposals. Some of these proposals could be introduced relatively easily by amendment to the Civil Procedure Rules, such as the introduction of a qualified one-way costs shifting regime, but for the most part primary legislation would be required in order to give effect to other recommendations, such as abolishing the recoverability of success fees from defendants. With the general election taking place this year, civil justice reform is unlikely to be high on the Government's agenda. The likely delay will provide a window of opportunity for those who have concerns about particular aspects of these recommendations to make them known before the reforms are finally implemented."


We surely are living in interesting times for mass tort claiming.
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Here is the article from the Chicago Tribune regarding Mr. Bernick; the text is pasted below.

Friday, January 22, 2010

Top litigator at Kirkland leaving for Philip Morris

David Bernick, a star litigator at Kirkland & Ellis, is leaving the firm to become general counsel at Phillip Morris International.

Bernick has been with Kirkland for 31 years and has been involved in nearly every type of complex litigation imaginable, from defending companies with asbestos liability to representing breast-implant manufacturers.

"I have spent my entire career at Kirkland & Ellis and I am proud to have contributed to the growth and success of one of the top law firms,” said Bernick in a statement provided by the firm. “I will remain close to my many friends and colleagues at the firm, but I look forward to pursuing new challenges during the next phase of my career with Philip Morris International.”

Kirkland's incoming chairman, Jeffrey Hammes, said: “David has been an integral part of our premier litigation practice, and his achievements during his 31 years at Kirkland are truly remarkable. We thank him for his varied and long-standing service to the Firm and we wish him success in his new role.

Bernick will join Philip Morris on March 1. As part of the move, he will relocate to Switzerland from New York.

Tip of the hat to Above the Law for breaking the news.

Australia and Asbestos - The James Hardie Saga, Its Asbestos Claim Payment Foundation - A Viable Alternative to Ch. 11 ?

Now it's west (from Chicago) to Australia, asbestos and the public company fiber cement business commonly known as James Hardie.

 The short story is that James Hardie and its officers and directors have been through a wringer as several were convicted of securities violations in connection with information disseminated regarding "asbestos liabilities" and a foundation set up by various former Hardie entities to manage and pay asbestos claims.   The convictions are on appeal. For more specifics on the past, look to the left for prior posts indexed under the topic "James Hardie." 

Rapid Global Movement Makes Local Policy Hard to Enforce:   Hardies actions are noteworthy for multiple reasons other than the securities convictions. For one, note that Hardie's recent global corporate "citizenship"  translocations from Australia to The Netherlands and now Ireland, all in just 9 years. The point? Money and ownership will move to wherever financial engineering offers a material opportunity to avoid taxes, achieve tax benefits, or avoid or limit liabilities. This point needs to be understood by policy makers, tort claimants, tort case co-defendants and insurers because of its implications for tort claiming and risk spreading.  Simply put, parochial local  approaches to tort law may be politically attractive at times (e.g. take action to save local jobs) but one should expect the tort system will be gamed just as some financiers play games with states in the US for financial incentives to relocate -  for a few years -  the corporate headquarters or a manufacturing facility. The wills of state legislatures, the long term abstractions of tort law professors, and the opinions of slow moving appellate courts are all much less relevant when, as now, ownership, the corporate "home" and money, can all be moved in a matter of  months.  (One wonders when an enterprising tropical island will enact legislation favorable to companies facing long tail tort claims. One might look to the precedent set in the  UK with FSA legislation that helped the "the names" and the Lloyds insurance market run away from their insurance obligations. Or, one might also consider states that set up rules considered unduly favorable to one side or another - some might say that West Virginia, Texas, New York, South Dakota, and Delaware all provide classic examples of this approach  ... )

Private Tort Claim Foundation as an Alternative to Chapter 11 ?  By any reasonable standard, current and former Hardie entities  Hardie entities face claims for  at least a billion or two of claims, and maybe much more, depending on how one defines claims (do overseas claims count; what about property damages claims). In the US, the now-defined answer would be to file one or two subsidiaries file a Chapter 11 case in Delaware or New York. Then, via the parent company chipping in some money and/or rights related to some "shared insurance," the parent and all subsidiaries likely would end up with an injunction  purporting to protect them against a future claim anywhere in the world. Thanks to the rampant lack of due process and the resulting lack of objectors in chapter 11 cases (highlighted most recently by GM and Chrysler), most such plans succeed, at least in the sense that confirmation is obtained.

Hardie, however, did not pursue that path and instead set up a private foundation to manage and pay claims, backed by some conditional promises of future cash flow from Hardie entities. The foundation has now been in place for almost a decade. Future posts will explore some specific aspects of the Hardie foundation. For now, for 213 pages of Hardie facts and history as narrated by KPMG as advisors, go here and read/skim through a 2006 liability estimate.

While reading, note, among other things, that Hardie entities have been selling asbestos products since the early 1900s, owned a chryotile asbestos mine in Australia, sold products internationally, participated in various international joint ventures, and sold a wide range of asbestos-containing products. Sales included a asbestos-cement building materials, pipe insulation, and friction products, as well as sales of raw chrysotile asbestos fiber. Note also that some of Hardie's cement and insulation products included one or both of  two types of the highly lethal amphibole fibers, which are crocidolite (apparently mined in Australia at Wittenoom) and amosite from Cape or others in South Africa (amosite being a sort of a contraction for "asbestos from the mines of  South Africa").

Example of Why It May Pay to Give Effective Global Notice in Asbestos Bankruptcies

Here is an article from Japan this week that reports on finding Libby Mines vermiculite in buildings in Japan. The article claims the material was installed Zonolite. How can Judge Fitzgerald's orders in the WR Grace case bind these building owners if they were not given effective notice in a language they understand ?

Note also that the article indicates SEM (scanning electron microscopy) is now being used overseas to find fiber types.

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Highly toxic asbestos found in four buildings across Japan; current testing flawed

A widely-used building material has been found to contain asbestos in Tokyo, Hokkaido and Kagawa, in the first discovery of amphibole asbestos, the rarer and more dangerous variety of the toxic mineral, in buildings in Japan.

Asbestos fibers were found in at least four buildings: three community centers, one in Hokkaido and two in Kagawa Prefecture, and the ceiling of a private building in Tokyo. The latter three all used a vermiculite-based insulation called Zonolite. Measures to prevent the asbestos from scattering have already been taken at all the four buildings.

The findings were made by the Tokyo Occupational Safety and Health Center (TOSHC). Examining vermiculite containing relatively low-toxic serpentine asbestos using scanning electron microscopes, they found amphibole asbestos at concentrations of 0.1 to 1.5 percent -- enough to designate it an asbestos-containing material.

The center also found that trace impurities of aluminum and sodium matched those of a vermiculite sample taken from a mine in Libby, Montana. A study there found that 18 percent of residents of Libby tested after complaining about various health problems were suffering from chest-lining abnormalities.

A standard method of testing for asbestos used in construction materials was introduced in June last year, which local governments and other organizations have used to conduct their own studies. However, center expert Naoki Toyama points out, "We detected (asbestos) using the ISO method. Under the standard method, however, asbestos could be overlooked."

Travelers/Manville Remand - 2d Circuit Argument is Thursday October 22 at 2:00 PM

The Supreme Court's Manville/Travelers opinion was quite narrow (some might say advisory) and resulted in a remand of the case to the 2d Circuit to decide the extent to which the prior rulings are binding on various entities. As per this online docket, the Travelers/Manville argument on remand is set for oral argument today. at 2:00 pm at the 2d Circuit. Assuming I'm reading the schedule correctly, the appellate panel will consist of Judges Calabresi and Wesley, and also will include the now fairly famous Judge Rakoff sitting on the panel by designation. Go here to see the panels.

Transcript of June 25 GM Hearing on Withdrawal of Request for Asbestos Futures Representative

As a result of bugging the clerk's office and the court reporter's office, the transparency-blocking 90 day veil has now been lifted from some of the General Motors bankruptcy hearing transcripts.

Here is the June 25, 2009 transcript that reflects the asbestos plaintiff's lawyers withdrawing the request for appointment of a futures representative. The withdrawal was based on the grounds that there would not be a section 524(g) injunction order entered in the case and that orders entered in the case do not bind future claimants.

So, the asbestos personal injury litigation saga no doubt will go on as to GM at least for future claims. And, just as the bankruptcy court orders do not bind future personal injury claimants, the orders also should not bind underlying case co-defendants which decide to bring in those cases a contribution or apportionment claim against the new GM entity, if it survives.

Asbestos - UK - Update on Various Topics

I'm headed to London this weekend to chair an asbestos litigation conference starting On Tuesday the 29th, so this seems a good time for an update on new speakers added to the conference roster and on some UK developments regarding asbestos litigation.

Conference Update: Two additional conference speakers have been added. One speaker will address new research regarding the impact of the chapter 11 asbestos trusts in the United States. Some of the research data was released in the US earlier this month and quite explicitly proves that indeed the chapter 11 bankruptcies have a significant impact on the litigation fortunes of the defendants that remain in the tort system. The research was undertaken by Bates White and will be presented by Peter Kelso. Additional upcoming research on asbestos bankruptcies also will be discussed.

Another speaker was added to address the evolving topic of litigation as a target of investors. Litigation investment will be addressed in two ways. First, Selvyn Seidel of Burford Advisors will explain the nature of the business and how and why it is expanding. Second, additional speaker Andrew Evans will describe the emerging market in which defendant companies may pay other companies to take over some or all litigation risks in, for example, asbestos litigation. Mr. Evans is part of a business known as Litigation Resources Group that has its roots in Bates White work on the economic realities of asbestos litigation.



Conference registration is still open at the online site here. The conference runs all day on Tuesday the 29th and a half-day on Wednesday the 30th. I'm speaking on the 30th as part of a panel on asbestos trusts.



Pleural Plaques: Trade unions in the UK this week started ratcheting back up their efforts to persuade the UK government to enact legislation that would reinstate damages claims for pleural plaques. This September 24 article from the UK asserts that the unions expect "betrayal":

"Unions will again call on the Government to restore compensation for pleural plaques sufferers at the Labour Party Conference next week.

Gordon Brown was presented with a campaign video produced for the Trade Union and Labour Party Liaison Organisation by Jim Kennedy, political officer of construction union UCATT, this week.

Unions are demanding a new law to overturn the Law Lords’ 2007 decision that sufferers of the asbestos-related disease do not need compensation.

Mr Brown promised the TUC Congress that ministers would examine the question when Parliament returns. But UCATT warned earlier this year that they were expecting “betrayal” on the issue"

Asbestos in Schools Hysteria in the UK: Hard to believe the way asbestos-in-schools history is now repeating itself in the UK via essentially hysterical UK news articles that fail to take any lessons from like prior hysteria in the US. Thus, this article from the UK's Mirror newspaper rather hysterically reports that 50,000 law suits are expected against uninsured UK school councils for allegedly causing asbestos-related disease. The article states:


"Test case may lead to 1000s of asbestos compensation claims


By Mark Ellis 23/09/2009
A test case may open the floodgates to thousands of compensation claims for asbestos-related cancers, a court heard yesterday.
And it could create a massive financial burden on education budgets for generations to come.
The warning comes amid fears that many comprehensive schools built in the 60s are riddled with the potentially lethal material.
It also adds weight to the Mirror's Asbestos Timebomb campaign. Lord Justice Moses at London's civil appeal court heard that 50,000 cases against largely uninsured councils are expected over the next 40 years.

And he set the stage for a landmark ruling by allowing council chiefs at Knowsley, Merseyside, to appeal a £240,000 award.
The case involves Dianne Willmore, 49, who blames her time as a pupil for her incurable lung cancer.
Asbestos timebomb: For more information on the Daily Mirror's campaign visit our blog."


UK reporters actually interested in facts and reality would do well to take lessons from the US experience. Asbestos-in-buildings hysteria swept the United States in the 1980s as EPA and plaintiff's lawyers predicted waves of deaths of janitors and school teachers, and thousands of lawsuits arising from injuries to be attributed to the presence of asbestos in school buildings. Ultimately, the hysteria ended because defendants W. R. Grace, U.S. Gypsum and National Gypsum gathered and analyzed literally tens of thousands of air samples in school buildings. The samples were analyzed and evaluated by world-class experts, including Rich Lee and Morton Corn (Dr. Corn earlier was a highly senior OSHA official and oversaw a dramatic but thoughtful reduction in the PELs for asbestos) . Their peer reviewed articles and testimony ultimately stemmed the tide of hysteria because they proved that in most but not all instances, the indoor air in schools contained no more asbestos fibers than did outdoor air. They also proved that even if fibers are being released in a certain spot in the building, the fiber levels a few feet away are still normal. Morton Corn proved this by, among other things, using air sampling to monitor fiber levels at various points in a room in which he was using a baseball bat to strike an asbestos-containing ceiling material.

Meanwhile, asbestos-in-buildings lawsuits at first flourished in the mid to late 1980s and early 1990s but then faded away hen the plaintiff's bar realized that the cases were very hard to win and expensive to litigate. Indeed, my then-partner Pat Lamb and I went to trial for W.R. Grace back in 1995 on asbestos-in-buildings claims brought by the Chicago Board of Education and numerous suburban school districts. After several days of trial, the claims settled for a very modest fraction of the demand.



Today, asbestos-in-buildings claims do not exist in the US except in the non real world of chapter 11 cases where science and state law are routinely ignored. Why? Because Congress' section 524(g) gives economic power to claims that lack merit by giving claimants votes the debtors need to exit chapter 11, thus leading debtors to pay money to settle claims that plaintiff's do not in fact bring or win in state courts. This pattern once again highlights that chapter 11 decision-making for tort claims is seldom grounded in reality.

Quigley/Pfizer Asbestos Bankruptcy Trial Underway and Highlights Deep Flaws in the Chapter 11 Process as It Relates to Mass Tort Claims

This article from Bloomberg describes the start of the confirmation trial in the Pfizer/Quigley asbestos bankruptcy and reviews the case in general. The trial is to run off and on for 7 or more trial days, concluding Oct. 16.

Despite various efforts to paint the situation in other lights, Quigley essentially is a corporate shell doing nothing but running off tort claims, so the relevance/applicability of chapter 11 is not apparent. Indeed, according to Bloomberg, " Edward Weisfelner, a lawyer for asbestos victims, challenged precedents set by asbestos cases in the 1980s. said of this case, “We are allowing the Chapter 11 process to be rented out, for the benefit of the true economic party of interest,” Weisfelner told Bernstein, calling the case a “sham,” by Pfizer that abuses the bankruptcy code. He said the bankruptcy, which has cost $75 million over five years, was filed solely to protect Pfizer. The US Trustee's office also has raised issues on this topic, which is notable because that office has not done much in most of the asbestos-driven chapter 11 cases. In short, one key issue is the extent to which a parent company can pay money and obtain in exchange a bankruptcy court injunction to protect itself against future asbestos claims arising from its relationship to the subsidiary and/or its actions related to the subsidiary. Some procedural issues cloud what the bankruptcy court will and will not do in terms of ruling on those issues.

Also interesting will be the process of estimating the value of future claims. As I've described before here (see item 4) the chapter 11 "estimation" process used in mass tort cases was the subject of scathing criticism in the W. R. Grace asbestos bankruptcy case. The criticism took the form of a declaration by a Nobel prize winning economist, Dr. James Heckman. As he explains it, the estimation process is not even close to scientific and instead is far more about trying to predict the future claiming practices of plaintiff's lawyers based on what the lawyers did in the past. That of course brings to mind the usual investment fund disclosure that past performance is not a predictor of the future, a statement that surely is equally true for the claiming practices of plaintiff's lawyers. According to Professor Heckman, courts should not allow themselves to be used to make a ruling based on estimates built in part around the massive asbestos claiming frauds that Professor Brickman and others have described at length.

The Quigley/Pfizer case also somewhat addresses the reality that in some limited ways, some asbestos plaintiff's lawyers representing some cancer claimants are in some ways contesting the usual approach to asbestos chapter 11 cases because it gives far too much power to the lawyers representing the least sick claimants (if they are sick at all, in the every day sense of the word). This case is thus another part of the occasionally public intramural disputes between different asbestos plaintiff's lawyers, with the two basic camps composed of 1) firms that represent thousands of minimally sick claimants and 2) firms that represent relative handfuls of cancer claimants.

Another public example of those disputes occurred back when some plaintiff's lawyers went to Congress during the days of the so-called FAIR Act and testified about the deep flaws in the thousands of claims being mass-filed on behalf of persons who were at most minimally sick.

Another public indicator of the battle may be found in the chapter 11 trusts which include terms that impose "collars" (limits) on the amount of money that may be paid out in a given year to the least sick claimants.

The intramural battle between camps of plaintiff's lawyer goes on because Congress irrationally handed huge economic power to lawyers for the minimally sick when it enacted section 524(g) of the bankruptcy code. Economic power was created by including a term that requires a vote in favor of the chapter 11 plan by 75% of ALL asbestos claimants. That rule has been under some attack in this case as the lawyers for cancer claimants seek to reduce the value of the votes of the least sick claimants.

The same economic dispute between the cancer claimants and the minimally sick also applies to future personal injury claimants. However, the inherent and obvious conflict between these two subsets of future claimants is typically ignored in chapter 11 cases. How is the conflict ignored? By assigning one person the impossible task of trying to properly represent all future personal injury claimants.

Will There Soon Be Another Chapter 11 Tort Claim Trust for Chinese Drywall Claims Against an Insolvent Builder, Perhaps With Insurers Involved ?

This summer brought the Chrysler and GM chapter 11 cases in which bankruptcy courts issued wide-ranging injunctions that seek to block some or all tort claimants from pursuing some or all current and/or future tort claims against the insolvent entities and their successors and/or buyers. Now, as we move into fall, here's the latest example of the expanding use of chapter 11 injunctions and trust funds as the proposed means to resolve underlying alleged "mass tort" claims. These ongoing expansions make it even more important to scrutinize the rules to the process by which Wall Street is now able to use chapter 11 to eliminate or transfer financial responsibility for underlying mass tort claims. These ongoing expansions also make plain that there is a pressing need to pull down the veil of secrecy that blocks meaningful scrutiny of the operations of most, if not all, chapter 11 trust funds that resolve tort claims.

This latest example arises from this new motion filed in the Tousa home builder bankruptcy. The effort in Tousa parallels the approach taken in the WCI home builder chapter 11 case. The new motion in Tousa seek to continue the automatic stay to block tort and contract claims regarding buildings built with allegedly defective Chinese drywall. The motion seeks to continue to block the underlying lawsuits based on the prospect of creating a chapter 11 trust to resolve the same underlying lawsuits. Presumably the trust also would be used to resolve the claims that would arise if the court were to allow a proposed class action against Tousa by would-be drywall claimants . The proposed class action is the subject of other bankruptcy court motions.

The motion in Tousa is noteworthy for multiple reasons. For one, it asserts that the debtor will welcome the involvement of its insurers in creating the proposed trust. In contrast, in the asbestos chapter 11 cases, the debtors virtually always assert that trust are "insurance neutral," meaning that whatever happens in the bankruptcy court does not effect the rights of insurers. Based on that claimed neutrality, the debtors and plaintiff's lawyers almost always argue that the tort claim insurers lack "standing" to be involved in the bankruptcy court proceedings.

Insurers sometimes but not always disagree, depending on what view suits a particular insurer's interest in a particular chapter 11 case and its overall financial status. Usually, but not always, insurers that issued primary policies re heavily exposed to the tort claims, and so will seek to cut a deal with the debtor and the plaintiff's bar in order to achieve certainty. Other insurers that issued higher level excess policies tend to fight the debtor on the standing issue until they've created enough of a record that the debtor agrees to accept from the high-level insurer a nominal payment over time in return for a release of all obligations under the higher-level excess insurance policy.

The motion also is noteworthy for what it does not mention. For one, it makes no mention of the current or future rights of other, solvent companies that are now or will in the future end up as co-defendants in the underlying lawsuits. Co-defendant entities can be incredibly harmed by the terms of the bankruptcy trust if the terms cut off or in any way limits the right of co-defendants to bring cross-claims or equitable contribution claims against the debtor or the trust. In the chapter 11 asbestos cases, the trust terms almost always have imposed severe and unconstitutional limits on the rights of the co-defendants to bring cross-claims against the debtor or the trust. To be fair to co-defendants, bankruptcy courts can and should appoint at least one person to represent the interests of fat least future co-defendants.

Additional adverse impacts arise for co-defendants if secrecy is allowed regarding claims submitted to the trust fund and its payouts to particular claimants. Once again, the chapter 11 trust model should not be followed because in most such cases, the plan tosses a veil of secrecy over information regarding which claimants have made claims and what they have been paid. Co-defendants rightly argue that the veil of secrecy is poor public policy because court-ordered trusts should instead be transparent as a matter of public policy. Beyond pure policy issues, the veil of secrecy also is improper because it blocks the co-defendants from asserting state law rights. Secrecy also blocks legislators from understanding what really is or is not being done to compensate legitimate and illegitimate claimants.

The motion also is significant because it does not mention various other sources of conflicts between constituencies with interests in the terms of a trust created to resolve tort system claims. One source of conflicts is that persons with strong and serious claims do not want to see trust fund money frittered away on payments to spurious or marginal claimants. Once again the asbestos chapter 11 cases highlight the problem because most of the trusts have been put in place with terms that have allowed billions of dollars to be paid to claimants who are not "sick" in any meaningful way.

Here are key excerpts from the Tousa motion:

4. Among other things, the Debtors are aware of the recent plan of reorganization confirmed in the chapter 11 cases of WCI Communities, Inc. and certain of its affiliates (collectively, “WCI”) in which WCI successfully managed its liability with respect to Chinese Drywall by implementing a global strategy that will address Chinese Drywall claims through the use of a trust, a channeling injunction and claims liquidation procedures. Additionally, the plan of reorganization permitted WCI to efficiently address its’ claims against its insurance carriers as well as the installers and manufacturers of Chinese Drywall. While the Debtors continue to analyze their own Chinese Drywall cases and their prospects for a chapter 11 plan, the WCI approach offers one possible alternative to piecemeal litigation of Chinese Drywall claims.

5. The Debtors intend to work with their major creditor constituencies in an effort to establish a global strategy with respect to claims arising from or relating to Chinese Drywall. This global strategy will prevent a “race” to insurance proceeds by similarly situated claimants that will have the negative effect of depleting the amount of insurance available to satisfy other claims or, otherwise, impact the Debtors’ ability, as a practical matter, to craft a more comprehensive resolution of the Chinese Drywall-related claims. To that end, the Debtors intend to involve the alleged holders of Chinese Drywall-related claims and the Debtors’ insurance carriers in any such discussions. Based on the Debtors’ desire to develop a global resolution of the Movants and similar claims, the Debtors have filed this objection.


Hat tip to LAW360 for noting the motion to continue the automatic stay.

Update on Bates White Paper on Impact of Asbestos Bankruptcies

Now online here at no expense is a new paper by the economists at Bates White. The paper is titled "The Naming Game" and is well-worth reading because it uses data from Alameda County to prove the reality that when defendants have exited the tort system to chapter 11, plaintiffs lawyers have in fact sought out and sued new defendants with increasing frequency. The paper also raises other interesting questions for discussion another day regarding the practices of plaintiff's lawyers in collecting money from asbestos trusts AFTER they have finished collecting money in the tort system.


The online article is a reprint from the September 2 issue of the Mealey's report for Asbestos Litigation.

Update on GM and Chrysler as to Asbestos Claims

An update seems appropriate in light of the "new" cert petition filed in early September, and comments this week from the asbestos plaintiff's bar (Joseph Rice of Motley Rice and Robert Phillips of SimmonsCooper) during a seminar panel discussion on the status of various chapter 11 cases. The bottom lines seem to be as follows as to Chrysler and GM.

1) As I've described before, the Second Circuit's August 5 opinion in Chrysler explicitly articulated caveats as to which if any tort claimants will be bound by the rulings to date. That was obviously a victory for the asbestos plaintiff's bar and they ultimately decided it was a strong enough win to make the choice not to pursue further appeals in GM or Chrysler. Instead, they will in the future fight the issues of which if any would-be future plaintiffs are bound and as to what issues.

2) The Indiana Pension Fund plaintiffs are now trying to obtain certiorari on the fundamental issue of whether section 363 asset sales can be used to sidestep the normal confirmation process. Go here for a Scotusblog summary and a link to the cert petition. As Todd Brown has described before in pointoflaw.com, and as is described in other posts collected here, the rights of future plaintiffs can be or have been sacrificed in the context of section 363 sales since that process allows the debtor to avoid many of the "rigors" (such as they may be) of the confirmation process. And, as I've pointed out, that group of future plaintiffs includes asbestos co-defendants and subrogated insurers. So, if granted, the certiorari petition would raise issues of importance to future chapter 11 cases that include mass tort claims.

Oh What Chapter 11 Could Do for a Soon to be Bankrupt Asbestos Mining Firm

Looks like another asbestos bankruptcy is ahead. This bankruptcy apparently will involve an asbestos mine in Zimbabwe, according to this article from The Zimbabwe Times. According to the article, the mine is not paying its 2,000 workers their meager weekly wages, and some say that the mine is crucial to Zimbawe's mining sector that supports much of the national economy and many jobs.

How easy it would be to solve the mining company's problem if only chapter 11 could be invoked. If that were so, then judging by rulings in cases such as GM, Chrysler and Lyondell, the near-bankrupt mining company could use chapter 11 to create an answer for its problems. To do that, it could find a buyer willing to purchase and operate the mine through a section 363 asset sale. The asset deal could include a term conditioning the deal on a Zimbabwe bankruptcy judge issuing a global injunction specifying that that the miners are enjoined from making an claims for past wages or from making any future claims for any disease that may arise from their work.

The Zimbabwean bankruptcy court also could use its awesome powers under Zimbabwe bankruptcy code section 105 to enter an injunction stating that if the workers at the mine ever become sick and sue for damages for asbestos-related disease, then the defendant entities in those tort suits are barred from suing the mining company for contribution. (Such co-defendants, might be, for example, a later employer and companies that sold equipment used at a manufacturing plant, say for example the seller of a large pump with one asbestos gasket that was serviced twice a year by some other person). Citing the mining company's desperate straits, its key role in the economy, and the lack of other willing buyers, the judge could quickly order a hearing to be held in a remote location far away from the mine on little or no notice to interested parties such as the miners and foreseeable future co-defendants, discovery could be truncated to the point of really not existing, and the hearing could be held in marathon sessions unavailable to most persons. Then the public hearing transcripts could be sequestered for 90 days afterwards.

Can you imagine the claims of "kangaroo court justice" that would follow from US lawyers if Zimbawe's legal system actually followed such a procedure and entered such orders?

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Here are key quotes from the article:

"ZVISHAVANE – The government and management at the country’s major asbestos producer, Shabanie Mines, have failed to stop a week-long strike by the estimated 2 000 mine workers there.

Industry experts warn the prolonged job boycott by the asbestos miners could compound the company’s financial problems and cost the country millions of dollars in lost export earnings.

The workers downed tools last Monday to press the State-owned Shabanie Mashaba Mines (SMM) to pay them salaries due to them since the beginning of the year.

The Zimbabwe Times was informed that the now largely bankrupt company has failed to pay workers since January and has randomly selected a few workers each month to pay appallingly low monthly stipends of as low as US$30. It has since emerged some of the workers are now demanding that the State-run multimillion-dollar asbestos producer be returned back to self-exiled businessman Mutumwa Mawere, the former owner.

Since January, the company has made only three pay outs and only to a quarter of the 2 000-strong workforce.

The stand-off was referred to an arbitrator in Masvingo in August, but he has failed to resolve the drawn-out labour dispute.


***

Since the takeover by government four years ago, the company has faced critical cash flow problems amid allegations of looting by top Zanu-PF officials. The mining firm is reportedly facing critical viability problems because of a hostile operating environment, and has for the past eight months failed to reach a compromise with the workers.

Several of Zimbabwe’s mining firms face collapse also because of lack of hard cash to buy new machinery and spares.

The perceived high political risk because of Zimbabwe’s lawlessness and political violence has also scared away foreign investors with investment funds to shore up the depressed mining sector."

New Bates White Paper on Asbestos Litigation, Bankruptcy Trusts, and Plaintiff's Habits in Naming Defendants

Just in time for upcoming asbestos litigation seminars. the economists at Bates White have issued a new report on asbestos litigation, asbestos trusts and the practices of plaintiff's lawyers in choosing and naming defendants to target in lawsuits. The article is well-worth reading as it uses data from Alameda County to prove the reality that as defendants have exited the tort system, plaintiffs lawyers seek out new defendants, among other things.

The article is in the new September 2 issue of the Mealey's report for Asbestos Litigation, or presumably is available through Lexis/Nexis in general.

Chrysler Opinion by 2d Circuit - Todd Brown Comments On the Sacrifice of Rights of Future Claimants and I Pile On Regarding The Scope of Future Claima

Todd Brown is a former defense-side lawyer (Wilmer Hale and Jones Day) now teaching law in Buffalo after a stint at Temple. Mr. Brown has written pretty extensively and astutely on deep flaws in asbestos bankruptcies (see my post here regarding his prior law review on section 524(g)). Mr. Brown has been guest blogging and commented here on Pointoflaw on two aspects of the 2d Circuit's Chrysler opinion. As it pertains to tort claimants, Mr Brown said the following:

" Second, the panel addressed the various arguments that the Chrysler assets could not be sold free and clear of successor liability for various personal injury type claims. Here, the panel adopted a fairly broad reading of the "interests" that can be cleansed in a Section 363 sale, reasoning that this interpretation is more consistent with the purpose of this section and the priority scheme of the Bankruptcy Code.

The panel refused to weigh in on the question of whether a Section 363 sale can cleanse future claims (such as those that might arise from asbestos exposure). This not only makes sense in the abstract; it is the right approach for future claimants. As we have seen in the 524(g) context (which requires setting aside funds to pay current and future asbestos claims, among other things), future claimants' interests are often sacrificed by those currently asserting asbestos claims against bankruptcy estates. Now that courts have started taking a harder line against these schemes, it is easy to see how the 363 sale approach might be viewed as a possible end-run around 524(g)'s limitations on front-loading recoveries. Until the "free and clear" sale's applicability to future claimants is clarified, however, such an end-run remains, at best, extremely risky for most asbestos defendants." (emphasis added).

Todd certainly is correct that the the interests of future claimants have repeatedly been been sacrificed in the asbestos chapter 11 cases. To go further, recognize that future claimants are NOT just the personal injury claimants, and instead there are multiple types of future claimants against the debtor's estate. Future claimants may be, for example, state agencies that want to recoup expenses from a debtor that caused personal injuries or created an environmental mess. Future claimants also include underlying case co-defendants which want to pursue cross-claims against former co-defendants now hiding behind chapter 11 injunctions The same applies to those insurers with subrogation and indemnity rights. against debtors.

Bankruptcy judges and plan proponents may in the future rue the day they did not 1) give due process notice to these groups of future claimants, and 2) did not cause appointment of a futures representative who actually intended to and actually did represent the interests of these other groups of "future claimants."

W.R. Grace, Solvency Findings, Asbestos Liability Estimates, and Injunctions that Bind Others

Today's post follows up on this August 13 post regarding asbestos plaintiff's lawyers asking the Court to order the rest of the world not give any effect to whatever the Court finds on Grace's solvency, and item 4 of this prior post of May 12 regarding Nobel prize winner James Heckman's expert report in Grace in which he and the non-asbestos creditors indicted bankruptcy court estimation proceedings as having no scientific validity.

The topic today is Grace's August 7 trial brief asserting that it is impossible for the Court to determine whether Grace is solvent or insolvent, and that instead it should just find that Grace will be solvent and viable if the plan is confirmed. Grace's brief [Docket 22732] is available through PACER or here.

Key quotes from the Grace brief are below. The gist is that estimates of its "personal injury liability" range from a low end of $ 200 million (from Grace's expert, Tom Florence) to $ 6.2 billion (plaintiff's expert Mark Peterson). In addition, its "property damage liability" is estimated by some at about $ 3-5 billion, with one calculation suggesting $ 82 billion. The facts, as argued by Grace, are set out below. The question I pose is this:

In tort cases, we say that good science must be applied. In business litigation, the general rules is that damages must be proved with reasonable certainty. Given those rules, why would it be socially useful and/or constitutional for bankruptcy courts to issue world-wide injunctive orders without making actual factual findings on key issues when the factual claims are so extremely different as they are in the Grace case, and the answer on solvency plainly could come out on either side of the solvency question?

In posing that question, I recognize that Grace and others will and do say that what we need most are deals that end litigation and that courts should accept deals. But, isn't it also fair to say that individual case settlements are much different because, unlike Grace's desired confirmation order, those other settlements do not include sweeping injunctions purporting to bar and limit the manner of future prosecution of tens or hundreds of thousands of present or future claims to be asserted by personal injury claimants, and that also will enjoin cross-claims or subrogation claims to be asserted by underlying case co-defendants and/or insurers in those same hundreds or thousands of future personal injury claims?

The Grace brief states the following, at 12-14:

"Among the most significant hurdles that the Committee and the Lenders must overcome
before they even get to the analysis under section 1129 is the requirement that they prove the Debtors are solvent. This they cannot do. The most significant component of Debtors' liabilities, the Asbestos PI Claims, has never been agreed upon or adjudicated. The estimation proceeding, which was designed specifically to estimate the value of the Asbestos PI Claims,was not completed. And there has never been an agreed upon or adjudicated resolution of Debtors' potential property damage asbestos claims. Without such adjudication, the liabilities cannot be established, and the Lenders and Committee cannot prove that the Debtors are solvent.

The incomplete estimation proceeding only highlights the fact that, absent the Plan, there is an enormously wide range of estimated values of the Debtors' asbestos liabilities. For example, the Debtors' estimation expert, Dr. Tom Florence, estimated that value of Debtors'asbestos personal injury claims ranged between $200 million and $989 million with a median value of $468 million. But Dr. Denise Martin, another one of Debtors' experts, determined that at the standard 95% confidence interval for scientific reliability, Dr. Florence's estimates could range from $4.6 million to $6.3 billion. The PI Committee's expert, Dr. Mark Peterson, could
offer no more definite estimates of Debtors' asbestos liabilities. He opined that Debtors' potential liabilities for asbestos personal injury claims were "between $4.7 and $6.2 billion and most likely between $5.4 and $6.2 billion." See Expert Report of Dr. Mark Peterson in Connection with the Asbestos Personal Injury Estimation Hearing, dated June 20, 2007 at ES-5 (Dkt. 16113, Ex. A).

Likewise, the value of the Zonolite Attic Insulation ("ZAI") claims is also highly
uncertain and disputed. While the Plan provides between $54.5 million and $58 million to ZAI (and potential additional contract payments), ZAI made substantially higher demands. For example, ZAI claimants have previously stated that ZAI could potentially be in 11 million homes5 with a value of$5,000 to $7,500 per home,6 for a total of up to $82.5 billion. Even using the claimants' lower estimates of 1 million homes7 at a value of $3,000 to $5,000 per home, the total liability would be $3 billion to $5 billion. The range of non-ZAI Propert Damage liability is also entirely uncertain. While the Plan provides $ 49.3 million for non-ZAI Property
Damage claims, the potential claim was much greater. Together, the total potential Property Damage liability, absent a Plan, reaches at least $3.149 billion to $5.149 billion and may be much greater.


B. The liability disputes foreclose any demonstration of solvency. The Plan
disposes of that liability and therefore cannot be relied on to prove solvency.

As described above, there has never been an adjudication of Debtors' asbestos liabilities, and estimates of those liabilities vary greatly. There is simply no estimation method that can accurately measure the Debtors' asbestos liabilities. Without a binding determination of Debtors' potential asbestos liabilities, there cannot be a final and binding determination that Debtors are solvent. Zily Aff. ~ 4.9

As discussed infra, the Lenders' new expert, Robert 1. Frezza, relies on estimates from the never-completed estimation hearing to attempt to "determine" Debtors' solvency. This attempt is unavailing. Indeed, the only way that Mr. Frezza can even begin to argue Debtors' solvency is by relying upon the Plan, the very one to which the Committee and the Lenders now object. Absent the Plan, there is no cap on Debtors' asbestos liabilities. As already noted, the Proposed Asbestos Settlement, which forms the basis of the Plan, does not represent an adjudication of the Debtors' asbestos liabilities. Rather, it represents a compromise that disposes
of the need to adjudicate those liabilities. Without the Plan, all that is left are potentially enormous amounts of asbestos liabilities, the adjudication of which would determine whether Debtors are solvent. In other words, the Plan does not prove solvency; it paves the way for solvency from and after the Effective Date."