Complex Insurance Coverage Reporter – July 2019

Garlock Five Years Later: Recent Decisions Illustrate Ongoing Obstacles to Asbestos Trust Transparency

By: Amy E. Vulpio

In In re Garlock Sealing Technologies, LLC, 504 B.R. 71 (Bankr. W.D.N.C. 2014), the court confirmed what many asbestos defendants and their insurers long suspected: that “the withholding of exposure evidence by plaintiffs and their lawyers was significant and had the effect of unfairly inflating the recoveries against Garlock” and other defendants. This “startling pattern of misrepresentation” included plaintiffs’ attorneys who, out of “perverted ethical duty,” counseled their clients to file claims against multiple trusts without valid factual grounds for so doing. Such “double dipping” and other abuse not only harms asbestos defendants and insurers, but also dilutes recoveries for legitimate claims. Now – five years after Garlock – the Department of Justice (DOJ) has launched a coordinated initiative to fight asbestos trust fraud and mismanagement. However, a series of recent bankruptcy court rulings suggests that this initiative stumbled out of the gate by focusing on the wrong issues. Asbestos defendants and their insurers can learn from the DOJ’s missteps.

In November 2017, invoking Garlock, 20 state attorneys general wrote to then-Attorney General Jeff Sessions asking him to devote DOJ resources to fighting asbestos trust abuse. A September 13, 2018 DOJ press release announced an initiative to increase the transparency and accountability of asbestos trusts. Through its United States Trustee Program (UST), the DOJ objected to the debtors’ proposed legal representative for future claims (FCR) in several Chapter 11 cases involving asbestos liabilities: Lawrence Fitzpatrick in Duro Dyne and James L. Patton, Jr. in Maremont, Fairbanks and Imerys Talc.

While acknowledging the need for a FCR in each case, UST objected to the debtors’ proposed candidates. Attempting to turn their extensive prior experience with asbestos trusts against them, UST portrayed them as part of a “closed group” of asbestos trust professionals whose advocacy would be tempered by a desire to be engaged in future cases. UST cited Garlock as evidence that Patton and Fitzpatrick had failed to adequately safeguard against fraud, mismanagement, and inflated professional fees in past engagements. According to the DOJ, the debtor’s choice of FCR deserved no deference and letting the debtor pick a FCR is akin to allowing the target of an investigation to choose the investigator. Rather, additional candidates from outside the closed group (i.e., without prior asbestos trust experience) should be solicited.

In each case, the court prioritized the immediate need to preserve trust assets by providing an expedient path to plan confirmation over the more remote and nebulous risk that the trust might fall victim to fraud down the road.

  • In In re Duro Dyne National Corporation, Case No. 18-27963 (MBK) (Bankr. D.N.J. Feb. 20, 2019), Judge Kaplan articulated “serious concerns” that adopting UST’s approach “would for all practical purposes render a pre-negotiated plan impossible for those seeking a channeling injunction.” He expressly rejected the objectors’ heightened “independent and effective” standard, observing that “[d]emanding proof of effectiveness can become a dangerous and slippery slope for all professionals in a bankruptcy proceeding.” While recognizing that “there can be value and valid reasons to challenge and reconsider the status quo,” Judge Kaplan declined to “imperil this company’s reorganization, add layers of additional administrative expense, place at risk the jobs of hundreds of employees, or unnecessarily jeopardize the recoveries for present and future claimants by delaying this reorganization through the appointment of a new future rep, who must retain professionals, [and] engage in his or her own due diligence, only to reach the same point of review” as Fitzpatrick. The UST filed an appeal in Duro Dyne, which remains pending.
  • Likewise, in In re Maremont Corporation, Case No. 19-10118 (KJC) (Bankr. D. Del. Mar. 11, 2019), practical considerations swayed Judge Carey. Noting that “Patton has been involved in this case for over a year, successfully assisting the stakeholders in getting to a prepackaged plan,” Judge Carey feared that appointing someone new would add “significant costs and delay to these cases.” In general, the process UST advocated – including soliciting additional candidates – would impair asbestos debtors’ ability to effectuate prepackaged bankruptcy cases. Rather, Judge Carey concluded, “[i]f it is correct that investigation into the process of FCR appointments is necessary or to the extent the system is flawed, that seems to be an exercise to be undertaken by authorities other than the judiciary.” Judge Carey approved Patton’s appointment, concluding UST had failed to show that Patton would be anything other than independent and effective.
  • In In re Fairbanks Company, Case No. 18-41768 (PWB), 2019 Bankr. LEXIS 1220 (Bankr. N.D. Ga. Apr. 17, 2019), Judge Bonapfel agreed with a majority of UST’s arguments, but nonetheless approved Patton’s appointment. Noting that any party may nominate a FCR, Judge Bonapfel concurred with UST that “a debtor’s or [creditors’] committee’s choice [of FCR] is not entitled to deference,” and that the standard for appointment “requires more than a determination that the candidate is qualified and disinterested.” Given present claimants’ competing interest in the same assets, FCRs “must also be capable of acting as an objective, independent and effective advocate for the best interest of the future claimants.” Ultimately, Judge Bonapfel found that Patton satisfied this heightened standard and that his experience in prior cases was an asset rather than a liability. Unlike Duro Dyne and Maremont, Fairbanks was not a prepack; Judge Bonapfel observed that Patton had engaged in no prepetition negotiations, mooting one of UST’s key arguments.
  • Similarly, in In re Imerys Talc America, Inc., Case No. 19-10289 (LSS), 2019 Bankr. LEXIS 1452 (Bankr. D. Del. May 8, 2019), Judge Silberstein balanced UST’s valid concerns with the need for pragmatism. Citing Fairbanks with approval, she adopted a heightened “independent and effective” standard, knowingly “depart[ing] from a long line of cases” – including Duro Dyne and Maremont – “in which the disinterestedness standard was applied.” Judge Silberstein noted that the relevant standard “has only recently been challenged and courts have only begun to explore the appropriate standard.” However, she found that Patton met the heightened standard and, like her fellow judges, rejected UST’s argument that Patton’s “experience should count against him.” While Imerys Talc was not a prepack, Judge Silberstein recognized, “it would not be possible to propose a prepacked case if a legal representative were not selected prepetition.” As such, Judge Silberstein approved Patton’s appointment, subject to his making certain additional disclosures.

Despite Judge Carey’s suggestion that “authorities other than the judiciary” would be best suited to address asbestos fraud, the legislative and executive branches of the federal government seem unlikely to craft a solution any time soon. The Furthering Asbestos Claim Transparency (FACT) Act would amend the Bankruptcy Code to require asbestos trusts to file quarterly reports – publicly available on the bankruptcy docket – disclosing all demands received from, and the basis for any payments made to, asbestos claimants. Since its introduction in 2013, FACT has remained stalled in Congress. On the executive front, the DOJ has experienced substantial upheaval in recent months. Attorney General Sessions resigned at the President’s request just weeks into the initiative. Sessions’ replacement, Attorney General William Barr, seemingly has other higher-profile issues on his plate. Principal Deputy Associate Attorney General Jesse Panuccio, who spearheaded the initiative, exited the DOJ in April 2019.

The DOJ may have detracted from its valid concerns about asbestos trust fraud by appearing to personally attack well-respected FCR candidates. The DOJ fared much better by filing traditional confirmation objections challenging specific aspects of trust distribution procedures (TDP) and offering constructive criticism aimed at better safeguarding against fraud. USTs in Duro Dyne and Maremont extracted TDP revisions using this more conventional approach. In Maremont, for example, Judge Carey directed debtors to revise the TDP to require claimants to provide certain additional information to the trust and to permit the trust to obtain other information in its discretion, and the debtor voluntarily modified the TDP to address other UST objections. The recent decisions suggest that insurers should consider proposing specific, attainable anti-fraud measures – such as enhanced reporting requirements akin to those proposed under FACT – that can be integrated into debtors’ proposed TDP. Even if DOJ leadership has lost interest in the issue, regional UST offices remain an invaluable ally for insurers in the fight for greater asbestos trust transparency.


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