Supreme Court hearing sheds light on tenuous nature of asbestos trusts

By The Madison County Record | Apr 2, 2009

Justice Stevens

Justice Ginsburg

A relatively odd dust-up between two different insurance defense lawyers embroiled in mutli-million dollar asbestos lawsuits lay at the center of a case heard by the U.S. Supreme Court on Monday.

The case, Travelers Indemnity v. Bailey, has asbestos lawyers concerned about its potential to turn the entire formation of bankruptcy trusts on its ear.

Any case that has defense siding with plaintiffs is unique enough. But with potentially billions of dollars in asbestos bankruptcy trusts on the line, the stakes in the Travelers case could be much higher than legal curiosity.

The public comments between the attorneys prior to the high court hearing have shown the strain.

In an American article released on the day of the hearing, Travelers Indemnity attorney Barry Ostrager said Chubb Insurance was given "the worst advice any lawyer ever gave a client," resulting in Monday's Supreme Court hearing.

Chubb attorneys fired back that Ostrager should be more concerned with his own advice, primarily advising his clients to negotiate a settlement of $500 million in asbestos claims outside the bankruptcy trust -- a theme Justices picked up on during the hearing.

Travelers settled with potential plaintiffs seeking to sue the company directly over its own duty to warn them about the hazards of asbestos, instead of just as the insurer of the plaintiff. To date, the courts have not ruled in favor of such lawsuits, the justices reminded Ostrager, making the settlement seem questionable.

Ostrager called it a business decision.

And that doesn't even begin to tell the whole story of this "mysterious case," as described by Supreme Court justices during Monday's hearing.

An uncertain impact

Rhetoric and legal theatrics aside, the Travelers case could become little more than another step of clarification on the rising tide of billions of dollars in asbestos bankruptcy trusts, some of which is already being paid out to claimants.

Ostrager suggested the case could lead the Supreme Court to rule against the constitutionality of the entire asbestos bankruptcy proceedings, according to the American story.

"Ostrager said the 2nd Circuit ruling has the potential not only to blow up the asbestos trust mechanism that has imposed order on asbestos litigation, but also to undermine Congress' constitutional power to regulate bankruptcy," American reported.

Ostrager argued to that effect before the Supreme Court justices on Monday saying the lower courts' rulings "misinterpret the intent of 524(g) and (h)," laws in the bankruptcy code that allowed for the formation of asbestos trusts.

"Another mystery in this most mysterious case," Justice Ruth Bader Ginsburg told Ostrager, borrowing a description used earlier in the hearing by Justice John Paul Stevens.

Part of the "mystery" isn't the case itself, but centers on why the court chose to hear this complicated case in the first place, according a Chicago defense attorney interviewed for this story.

Some are wondering if the Supreme Court chose it to make a significant impact on all other trusts, as it involves the first precedent-setting trust -- The Manville Trust, as well as Traveler's Indemnity -- one of the largest insurers of defendants in asbestos cases.

A Washington, D.C. attorney interviewed for this story agrees with the premise.

"The concern, I think it's fair to say, is that the court might reach out and limit 524(g)'s generally, or even perhaps declare it unconstitutional. That would be a far stretch for the Court. But, that's the underlying fear," he said.

The attorney, who asked not to be named, believes that despite the concern, a less disruptive, "inside baseball" type of ruling that clarifies certain points of law is more likely to come from the Court's decision.

Either way, the case sheds a light into the relatively obscure world of asbestos trusts, which, according to a 2006 article, "A Continuing History of the Companies That Have Sought Bankruptcy Protection Due To Asbestos Claim," represents "billions of assets being released to 524(g) trusts… Never before has such a large influx of funds hit the system," the authors explained.

"This is a really big deal," said a Madison County defense attorney who asked not to be named, of the Travelers case before the Supreme Court.

According to the Madison County attorney, the role of bankruptcy trusts -- and the lawsuits like Travelers that help define their future -- have created a lucrative settlement process that stands relatively outside the state tort system. As such, it threatens state tort reform, and even the jurisdiction of the courts themselves.

In the hopes of protecting themselves from unending lawsuits, more than 80 companies have filed for Chapter 11 citing asbestos lawsuits as the reason, according to a story published in The list of companies emerging from bankruptcy continues to grow and even some of the most lengthy cases, like that of W.R. Grace, are still working toward conclusion six years after filing. But they do see the end in sight.

Despite the optimism, some say the trusts have simply poured billions into plaintiff's coffers while leaving a trail of new defendants on the outside looking in -- the next potential wave of defendants in future case.

"It's sort of a crazy world that limits the judges from hearing from those who have a stake," the Chicago defense attorney said of the bankruptcy trust. "They are starting to create mayhem," an example of which is again Travelers, along with a long line of other well known cases involving the bankruptcy trusts.

The fall-out can be observed on every asbestos docket across the country, where some defendants are immune from litigation because of their status in bankruptcy courts, while other solvent companies are left to pay the entire settlement or jury award alone.

"The Travelers issue boils down to whether a bankruptcy court can issue a national (global?) injunction that bars any and all future claims against an insurer of the debtor after the insurer has paid money to settle coverage claims brought by the debtor against the insurer," a legal blog tracking the asbestos bankruptcy cases stated.

The effect turns one defendant against the other, case in point: insurance companies like Chubb and Travelers. The insurance companies are often the only entities left to challenge a given trust before it's approved in court.

Trusts are further complicated by companies who remain financially solvent, making deals with plaintiffs' attorneys to file against a bankruptcy trust, pay an agreed upon sum of money and then exit the bankruptcy system, a move Wall Street often rewards with soaring stock prices.

Halliburton is a prime example here, according to many legal professionals. Two of its subsidiary companies, DLL industries and KBR, reorganized in January 2005 after just over a year in Chapter 11.

"In settlement worth $5.3 billion, asbestos claimants got 100 cents on the dollar," The story states, with the attorneys representing those claimants earning as much as a third of that in fees.

"The fundamental problem is nobody understands it and nobody is paying attention and they just want it to go away," the Chicago attorney said. "If you are going to say the other defendants can't sue, then you've changed the state court tort system. How far are we going to let bankruptcy law go?"

Simply put, many asbestos lawyers believe that as companies emerge from bankruptcy, having contributed a collective $30 to $40 billion to be paid for past and future claims, savvy plaintiffs attorneys are finding ways to poke holes in the trusts to bring a new wave of lawsuits against companies once believed they were covered by the trust from future lawsuits.

Bates White LLC, one of the nation's leading researchers of asbestos litigation, said asbestos history has perhaps begun to repeat itself.

"The mistake … has been repeated throughout asbestos litigation," the authors wrote in a 2009 article. "Nearly every attempted solution has increased the incentives" for filing more claims.

The article asks the question, "Is bankruptcy trusts the 'final chapter?'" Not likely. But even how this chapter will be written remains unclear.

"A sea change in asbestos litigation is taking place today," Bates and Mullin, of Bates White LLC wrote in 2006. "The emerging 524(g) trusts have enough assets to entirely replace the likely tort obligations of their predecessor companies. In fact, these trusts may pay the average mesothelioma claim more than $1.1 million proposed under the FAIR Act. However, how these affluent trusts affect solvent defendants and asbestos claimants is unresolved."

The Supreme Court's ruling in its "mysterious" Travelers case could start to resolve it, either by a little, or perhaps, as some fear, a great deal. How that will end up, is as murky as most of the previous four decades of what is now known as the "longest running mass-tort litigation" in U.S. history, according to RAND Institute for Civil Justice.

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