The Value of E-discovery and Tort Law - Trial Judge Says Internal Emails Probably Hang UBS on Claims of Fraud in Connection with Sale of CDOs

The WSJ Law blog includes this post yesterday that illustrates the virtues of e-discovery and the ever-expanding use of tort law in claims between businesses. The post, by Ashby Jones, reports on and includes a link to a Connecticut opinon in which the buyer of cdos sued the seller (UBS) for fradulent concealment of material facts regarding an impending downgrade of the rating for the cdos. The post includes a link to the trial judge's nicely written opinion granting a motion for prejudgment secuurity for about $ 35 million. The opinion lays the facts that caused the judge to grant the motion, and relies in material part on quotes from various internal e-mails at UBS in which the securities were internally disparaged at UBS - before sale - as "crap" and "vomit."

The entire post and opinion make for an easy read for those interested in the litigation arising out of the recent financial fiascoes. For those who are not inclined to scan it all, here's a key quote that illustrates why paying for e-discovery can be worth it and why tort claims are seeing increasing use in litigation between businesses:


"But the court finds there is more to this case than that. Through direct and circumstantial evidence, Pursuit has established probable cause to sustain the validity of a claim that the UBS defendants were in possession of material nonpublic information regarding imminent ratings downgrades on the Notes it sold to the Plaintiffs, information UBS withheld from the Plaintiffs.

The use of the term “triggerless,” which was used by UBS to entice the Plaintiffs to purchase the same Notes they had earlier rejected, is akin to a representation by UBS that a gun being handed to the Plaintiffs is not loaded, when in fact UBS knew the gun was not only loaded, but was about to go off. The court takes UBS employees at their word when they referenced their Notes, these purported “investment grade” securities which they sold, as “crap” and “vomit”, for UBS alone possessed the knowledge of what their product, their inventory, was truly worth. While UBS would argue that such descriptors lack a precisemeaning, the true meaning of these words and the true value of UBS’s wares becameabundantly clear when the Plaintiffs’ multi-million dollar investment was completely wiped out and liquidated by UBS shortly after the last of the Note purchases was consummated.

That is the difference between a risk that something might happen to change the value of an investment, which is both a fact of life and a risk shared by all parties to any securities transaction, and the undisclosed knowledge that something will happen. That type of nondisclosure, whether it is on the part of a seller or a buyer, can cross the line into actionable securities fraud, and the court finds probable cause to sustain a finding that in this instance, it did. "

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Mass Tort Lawyers - Perhaps Wise to Keep an Eye on the Pleadings Before Judge Rakoff in the B of A Case

The point of this post is to suggest that mass tort lawyers for publicly traded entities need to keep at least a watchful eye on the gist of the papers being filed before Judge Rakoff in New York regarding the settlement between Bank of America and the SEC with respect to disclosure of future bonuses. Why? For one, the filings illustrate the increasing focus on lawyers and law firms in connection with alleged or actual corporate misdeeds. For another, the papers suggest issues regarding whether it is appropriate to put disclosures in non-public schedules to m & a agreements. No doubt the plaintiff's bar for securities cases is loving the proceedings.
This post from Susan Beck at AmLaw provides a nice tight summary of the new filings. The following paragraph from her story illustrates the basic issues:

"In this most recent filing, the SEC continued to dodge the question of who was responsible for the disclosure decision and refused to identify anyone at fault at BofA. But it had no problem heaping blame on Wachtell. The agency brandished excerpts from two publications by Wachtell partners informing clients about a 2005 SEC report in which the agency stated that companies should not hide certain material information in nonpublic "disclosure schedules." BofA had previously argued in court filings that this practice is common in the M&A world."

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.

The Tort Claim Industry - Seminar on Allocation of Losses Among Insurers and Insureds for "Nonproducts" Asbestos Cases and Environmental Cases

As noted before, substantive seminars are now a standard part of litigation industry and are indeed a driver of the industry. Today, for example, snail mail brought me brochures for seminars on drug and medical device litigation, automotive product liability litigation and food-borne illness litigation. The seminars usually are interesting because they bring the opposing sides together and force some dialog between the various constituencies. The participants of course do not put all of their cards on the table, but most seminars do produce some new insights and sometimes valuable data on a given substantive area if only because trial lawyers usually are competitive.

The tort litigation industry of course is driven by money. So, another significant part of the seminar industry is devoted to seminars and other educational forums in which the attendees focus on the distribution of financial responsibility for the underlying claims. Seminars of this sort run the gamut, including seminars regarding how to seek out insurance coverage, seminars on when insurers properly deny coverage, and issues between and among insureds, insurers and reinsurers. All of the issues of course must arise from some underlying set of facts, and then a variety of arguments regarding how the facts and attendant financial losses would or should be allocated between or among the various actors in the underlying facts, and their insurers and reinsurers. An example of this sort of seminar landed in my email in-box again this week and prompts this excursus. Specifically, Bates White and Environ will next week host a Chicago conference in which they will talk about the ways in which science and economics come together with respect to allocations of underlying losses from certain types of asbestos cases and "environmental cases."

The link for seminar registration is here, and attendance is free. See below for key excerpts from the description.
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Qualifying & Estimating Environmental Damages:How and when are policies triggered?

Losses to businesses or insurers from asbestos, environmental, and health hazards are inherently uncertain due to the long-term nature of such potential exposures. However the uncertainty can be mitigated by better understanding the damages and by understanding when and how much insurance will be triggered. This is accomplished through site evaluations, identifying all potential damages, and estimating future damages. For example, ongoing screening is done during site evaluations to determine when environmental damage (both historic and potential future) meets the definition of recoverability. These actions will ensure that companies and insurers alike know what potential costs will be and how they will be allocated.

Our experts from Bates White and Environ will demonstrate that for the typical policyholder facing potential environmental damages, our process and experience allows the insurer or policy holder to manage their risk moving forward. Quantifying Nonproduct Losses: How and when were claimants exposed?Which claimants’ exposure to asbestos occurred during business operations and which claimants’ exposure occurred afterwards? The answer to this question may determine if the policyholder’s insurers owe tens of millions, hundreds of millions, or billions.

If a claim is determined to be a “products” claim, such that exposure did not occur during the policyholder’s contracting operations, then insurance recoveries will be subject to the explicit aggregate limit specified in each insurance policy’s products and completed exclusion clauses. In contrast, if a claimant claims exposure during the policyholder’s operations, then the claim may fall outside exclusion clauses (such as a “non-products” claim) and the amount of insurance recovery may not be subject to an aggregate limit.

Our experts from Bates White and Environ will demonstrate that for the typical policyholder with contracting activities, a minority of its claimants were exposed while contracting activities were ongoing; the majority of claimants were exposed long after the contracting activities were completed. They will provide concrete examples. CLE accreditation of this program is approved in Illinois.

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More on Bankuptcy Court Powers and Cutting Off Claims in Tort Cases

Today, more on the amazing world of bankruptcy where some say bankruptcy code section 105 may be used to issue an injunction to solve pretty much any and all problems of a debtor parent,including issuing injunctions to protect solvent subsidiaries.


Courtesy of LAW360, here's the link to an amazing adversary complaint filed in the Lyondell bankruptcy. There, the debtor seeks to enjoin creditors from suing 94 affiliated entities not yet in bankruptcy regarding a paltry $ 650 million. So, rather like the Tribune seeking to give the Cubs the benefit of bankruptcy without all the annoying hassles of being bankrupt, we now see yet another debtor seeking the benefits of bankruptcy without having to undergo the hassles of bankruptcy, all on the theory that issuing an injunction would in some way help the debtor. (Actually, Lyondell has done much the same thing before - this is just a new example.) I used to be impressed by the awesome power of federal district judges, but they may be pikers next to a bankruptcy judges wielding bankruptcy code section 105 powers.

Think about how this same principle could play out in the context of product laibility or other tort claims against uninsured subsidiaries of a debtor. For example,the next case may be a debtor asking the court to enjoin inconvenient things like co-defendants in tort suits bringing cross-claims against debtor entities not in bankruptcy. Thus, Parent Co. could file for chapter 11 but not put sits ubsidiaries into chapter 11. Parent Co. could then go to bankruptcy court to ask for an injunction barring cross-claims or tort claims against subsidiaries on the grounds it could be inconvenient to Parent Co.

Bad policy? Giving debtors that kind of power surely gets rids of some of the incentives to do responsible things like buying adequate insurance, carefully manufacturing well-designed products or otherwise acting responsibly. That outcome is bad news for responsible entities left as targets in the tort system. And, how do good lawyers craft meaningful warranty and indemnification agreements for sales of products between entities if tort and contract risks and obligations can all be terminated just by filing a petition for a parent entity.


Can you imagine the howls of "unfairness" and "bad policy" if a Chinese bankruptcy court issued such an order to protect non-bankrupt subsidiaries of a Parent Co. maker of defective cars that killed or maimed many people ?


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Here's a key quote from the complaint:

NATURE OF ACTION
1. This is an adversary proceeding brought pursuant to Rules 7001 and 7003
of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).

2. The Plaintiff-Debtors assert this complaint for a preliminary injunction
pursuant to section 105(a) of title 11 of the United States Code (the “Bankruptcy Code”), Rule
65 of the Federal Rules of Civil Procedure, and Rules 7001(7) and 7065 of the Federal Rules of
Bankruptcy Procedure (the “Bankruptcy Rules”) to enjoin until at least January 31, 2010 any
attempts to enforce any rights or exercise any remedy under the $615,000,000 and
€00,000,000 8.375% senior notes due August 15, 2015 (collectively, the “2015 Notes”) against
guarantors of the 2015 Notes that have not filed a petition for chapter 11 protection (the “Non-
Debtor-Guarantors”).