Asbestos Bankruptcy Trusts

The federal Bankruptcy Code allows companies in bankruptcy proceedings to establish asbestos bankruptcy trusts, in which assets are set aside for the benefit of future claimants whose specific identity is unknown at the time of the bankruptcy. So-called “double dipping” can occur when a plaintiff seeks recovery from an asbestos bankruptcy trust without disclosing that recovery in litigation against other defendants.  Recent legislative amendments in Michigan will make it more difficult for individuals to engage in double dipping.

On February 8, 2018, the Michigan State Legislature passed House Bill 5456, which amended the Revised Judicature Act by adding the Asbestos Bankruptcy Trust Claims Transparency Act (the “Transparency Act”).  Currently, a plaintiff seeking compensation for asbestos exposure may seek redress in two ways: by filing a complaint in court, and by filing a claim against an asbestos bankruptcy trust.  To date, there are approximately 60 asbestos bankruptcy trusts in the United States with assets approaching $25 billion, which have been established for the sole purpose of paying asbestos-related personal injury claims.  Although the Transparency Act does not eliminate a plaintiff’s ability to seek compensation from both the trusts rand litigation, it imposes disclosure requirements to prevent a plaintiff from “double-dipping.”  Thus, under the Transparency Act, any compensation received from an asbestos trust will be credited against any judgment in the plaintiff’s favor.

Pursuant to the Transparency Act, a plaintiff in an asbestos action must, within 30 days after filing an action, provide a signed statement, under penalty of perjury, attesting that any and all potential asbestos trust claims that could be filed, have been filed.  In addition, a plaintiff must provide—to all parties—all trust claim materials,[1] including those that relate to conditions other than those that are the basis for the asbestos action.  Finally, if the plaintiff’s asbestos trust claim is based on secondary exposure through another individual, he or she must submit all trust claim materials submitted by the other individual.

The Transparency Act affirmatively requires a plaintiff to provide up-to-date trust claim materials, and it also provides defendants with tools to deter a plaintiff from failing to comply with her disclosure obligations.  A defendant in an asbestos action now has the ability to request a 60-day stay, if the defendant identifies an asbestos trust claim that a plaintiff has failed to disclose to the parties, and the defendant believes the claim should have been identified.  After a motion to stay the matter has been filed, the burden to lift the stay shifts to the plaintiff, who may respond in one of three ways: file the asbestos trust claim; file a response stating that there is insufficient evidence for the plaintiff to file the asbestos trust claim; or request a determination from the court that the costs to file the asbestos trust claim would outweigh the expected recovery.

The Transparency Act also provides safeguards for those scenarios in which a plaintiff first obtains a judgment in an asbestos action and then files an asbestos trust claim that was already
Continue Reading No More Double-Dipping in Michigan

Court Ruling

The Delaware Court of Chancery recently took a rare foray into the world of asbestos litigation after it was asked to appoint a receiver to distribute the remaining reserves from casualty insurance policies issued to Krafft-Murphy Company, Inc. (“Krafft-Murphy”) to plaintiffs who allege injury from asbestos-containing products used by Krafft-Murphy.  The Chancery Court, in an opinion dated February 4, 2013 (pdf download available here), concluded that Krafft-Murphy was no longer amendable to suit, as it had been dissolved in 1999.  Consequently, there was no need to appoint a receiver because there were no assets to distribute, as the insurance reserves were not assets of the corporation.  A more detailed summary of the case background and opinion are below.

Factual Background

Krafft-Murphy was incorporated in Delaware in 1952, and performed plastering and insulating services in Maryland, Virginia, and Washington, D.C.  It is alleged that Krafft-Murphy workers used Sprayed Limpet Asbestos as part of their insulating work.  Krafft-Murphy was first a defendant in asbestos personal injury lawsuits in approximately 1989.  Three years later, Krafft-Murphy ceased operations and, in 1999, the company filed a certificate of dissolution, but did not formally adopt a plan of dissolution.  Notwithstanding the fact that Krafft-Murphy has been dissolved, it allegedly still has insurance reserves that could provide payment in the event of a judgment against Krafft-Murphy.   

The Petition for a Receiver

In July 2010, Krafft-Murphy moved to dismiss asbestos personal injury cases pending against it in Maryland on the grounds that it was no longer a legal person pursuant to Delaware law, and, therefore, not amenable to suit.  In response, counsel for plaintiffs in those cases petitioned the Delaware Court of Chancery to appoint a receiver for the purpose of distributing Krafft-Murphy’s unpaid insurance reserves to the current and future claimants against Krafft-Murphy.  The petitioners asserted that the remaining insurance reserves were undistributed assets of Krafft-Murphy and argued that the Delaware Code empowered the Court of Chancery to appoint a receiver for the purpose of distributing those assets. 

Krafft-Murphy opposed the petition on the grounds that unpaid insurance reserves are only an asset of an insured once there has been a judgment against the insured.  Due to the fact that Krafft-Murphy was dissolved and is no longer amendable to suit, there can be no judgment against Krafft-Murphy.  Thus, the insurance reserves are not an asset of the company.

The Chancery Court’s Opinion

The Court agreed with Krafft-Murphy that insurance reserves become an asset of the insured only if and when that insured becomes liable to a third party.  The Court further concluded that Krafft-Murphy was not subject to liability for claims which arose more than 10 years after its dissolution.  As such, the insurance policies do not represent an asset to the corporation with respect to those claims.  Pursuant to Delaware law, the Court held that a dissolved corporation’s liability for claims extends up to 10 years from the date of dissolution.  The Court’s conclusion was based on sections of the Delaware Code that provide


Continue Reading Free and Clear: Dissolved Delaware Corporation Deemed Not Liable for Asbestos-Related Liabilities More than 10 Years After Dissolution

Congress

Recently, the Subcommittee on Courts, Commercial and Administrative Law of the U.S. House Judiciary Committee, held a hearing on an important new bill aimed at furthering transparency in asbestos bankruptcy trusts.  Proponents of the controversial new bill, entitled H.R. 4369, the “Furthering Asbestos Claim Transparency Act (FACT) Act of 2012,” say that it would shed some much-needed light on the secretive claims processes of the bankruptcy trusts.

Asbestos-related liabilities have plagued hundreds of corporate defendants over the past twenty-plus years. Many have sought protection under Chapter 11 of the U.S. Bankruptcy Code.  Section 524(g) of that Chapter allows a debtor company to channel asbestos claims to a trust set up for the purpose of paying those claims.  Pursuant to that Section, the trust assumes the asbestos liabilities and the debtor’s assets are transferred to the trust, which then pays the asbestos-related claims.  The debtor company is thus relieved of all present and future asbestos-related liabilities.  See GAO-11-819, at 2-3 (2011), Report of theU.S. Government Accountability Office to the Chairman, Committee on the Judiciary, House of Representatives: Asbestos Injury Compensation; The Role and Administration of Asbestos Trusts, (pdf download). The problem, according to proponents of H.R. 4369, is that the claims process is a private, non-adversarial administrative process, and is shielded from public scrutiny by complex “trust distribution procedures,” or “TDPs.” Marc Scarcella, an economist at Bates White, LLC, testified in support of the bill.  Mr. Scarcella addressed concerns about the lack of mechanisms to cross-check trust claims against claims made to other trusts or in the tort system:

“lack of transparency and accountability may incentivize specious and inconsistent claiming across the tort and trust systems” and “may result in trust funds being depleted by erroneous payments.”  Hearing Before the H. Jud. Comm. Subcomm. On Courts, Commercial and Administrative Law, 112th Cong. (2011-2012) (statement of Marc Scarcella, Bates White, LLC).  H.R. 4369 would preclude such misuse by requiring each trust to file quarterly reports which disclose: (i) who has filed a claim against the trust; and (ii) the asbestos exposures alleged by each claimant.  See id.

The lone opponent of H.R. 4369 at the hearing was plaintiffs’ attorney Charles Siegel of Waters & Kraus LLP.  Attorney Siegal testified that the legislation “would place new burdens on trusts … but would only serve solvent defendants’ interests.”  Mr. Scarcella addressed these concerns, however, by stating that the new transparency considerations would benefit everyone involved, particularly future claimants.  Moreover, he testified that the reporting would not burden the trusts because the claims administration process is controlled electronically.

Concerns about asbestos bankruptcy trusts is not new. There are legislative efforts at reform underway in several states, including Ohio, Lousiana, and Texas, to name but a few.  The fact that the issue has finally made its way before the U.S. Congress is heartening, but there is a long way to go.  The bill in its current form does not appear to address the filing of


Continue Reading Shed a Little Light: Congressional Hearing on Asbestos Bankruptcy Trusts Promises Much-Needed Transparency