March 10, 2004
Speaker: Prof. Lester Brickman
Center For Legal Policy at the Manhattan Institute
Let me start by bringing you up-to-date on asbestos litigation. Although you would be hard put to find it reported in the national press, approximately 110,000 new asbestos claims were filed in 2003—the most ever in one year, bringing the total number of claimants to over 700,000. The cost to defendants and insurers now totals $70 billion and predictions of the final cost are as high as $250 billion. Only a relatively small percentage of insurers’ and businesses’ shares of the projected remaining $180 billion have been reserved. Among the thousands of new defendants being added are distributors of asbestos-containing products, stores that sold the products and more distant suppliers, bringing the total number of defendants to over 8000. No end is in sight as this weapon of mass business destruction cuts deeper and deeper into the American industrial process and product distribution system.
As the cost of the litigation to business and insurers has galloped to new heights, the disconnect between medical science and our tort and bankruptcy systems becomes more extreme. The press has widely reported that many of the claimants have no lung impairment. This is true but misleading. In fact, 80-90% of asbestos claimants have no asbestos-related illness recognized by medical science. No matter how hard you search the pages of our leading newspapers, the New York Times, The Wall Street Journal, etc., you will not find this reported. Since the press has done such an abysmal job of reporting what is happening in asbestos litigation, let me repeat what is perhaps the single most salient fact that characterizes the mother of all litigations: 80-90% of those making claims have no asbestos-related illness recognized by medical science.
To understand the massive disconnect between medical science and tort litigation, I undertook an extensive empirical study of asbestos litigation. On the basis of that study, which has been published in a law journal and which you can access at www.ssrn.com/asbstract=490682, I have reached the following conclusions:
Approximately 90% of asbestos claims today largely consists of former industrial and construction workers and others:
(1) recruited by an extensive network of entrepreneurial companies which are employed by lawyers to “screen” hundreds of thousands of potential litigants each year at local union halls, hotel and motel rooms, shopping center parking lots, and other locations throughout the country to assemble the “inventory” that fuels the litigation;
(2) asserting claims of injury though they have no medically cognizable asbestos –related injury and cannot demonstrate any statistically significant increased likelihood of contracting an asbestos-related disease in the future;
(3) these claims are being asserted in a civil justice system that has been drastically altered to accommodate the interests of these litigants and their lawyers by dispensing with many evidentiary requirements and proof of proximate cause, giving rise to what I have termed “special asbestos law;”
(4) mostly in so-called “magic jurisdictions” where judges and juries not only appear aligned with the interests of plaintiff lawyers but where the outcomes of such litigations are known before the cases are filed;
(5) these claims are often supported by specious medical evidence, including: (a) evidence generated by the entrepreneurial screening enterprises and B-readers—specially certified x-ray readers that the plaintiff lawyers select, who receive millions of dollars a year in income for producing bogus medical evidence which is not a product of good faith medical judgment, and (b) pulmonary functions tests which are often administered in knowing violation of standards established by the American Thoracic Society and result in findings of impairment which would not be found if the tests were properly administered.
(6) Finally, these claimants frequently testify according to scripts prepared by their lawyers which are replete with misstatements with regard to: (a) identification and relative quantities of asbestos-containing products that they came in contact with at work sites, (b) the information printed on the containers in which the products were sold, and (c) their own physical impairments. As former targets of the litigation enter bankruptcy and replacement deep pockets are cultivated, witness testimony about products in workplaces 30-40 years ago simply shifts to accommodate such changes—compelling circumstantial confirmation that the testimony is orchestrated by plaintiff lawyers.
It is beyond cavil that asbestos litigation thus represents a massive civil justice system failure. Indeed, in my study, I refer to the litigation as a “malignant enterprise.”
An increasing amount of asbestos claiming is now being channeled through the bankruptcy process where such proceedings are largely insulated from public view. The issues are complex and newspaper coverage fails to inform the public of what is occurring which, in plainest terms, amounts to a perversion of legal process. The leading plaintiff law firms, a baker’s dozen or so, completely control the bankruptcy proceedings. Laden with boundless conflicts of interest which are ignored by the courts, they create the bankruptcy plans, establish the criteria for the payment of the very claims which they are asserting, select the trustees to operate the trusts that will be created to actually pay the claims (with the approval of the bankruptcy court which virtually always is forthcoming) and constitute the Trust Advisory Committees which have veto power over changes in the Trusts’ structure. The TDPs (Trust Distribution Procedures) they create allow these lawyers to treat the trusts’ funds as “piggy banks,” accessible at will irrespective of whether a claimant is actually injured or had actual exposure to defendants’ products, let alone whether the exposure was a substantial factor causing injury. In fact, in some cases, all that is required to “prove” the requisite exposure is for the claimant to sign a form saying he was exposed.
The bankruptcy trusts are being created as a result of the enactment by Congress in 1994 of a special set of bankruptcy provisions designed to facilitate the reorganization of firms with asbestos liabilities (11 U.S.C. §524 (g)-(h)). Under these provisions, the asbestos claims against an insolvent debtor are channeled to a “trust” which is funded by equity provided by the debtor and increasingly, by the debtor’s insurance coverage. For the trust to be established and thus insulate the debtor from future liability, 75% of claimants must vote to approve the plan. Because this vote is on the basis of “one man, one vote,” it gives plaintiff attorneys an additional incentive to troll for more “un-sick” claimants to add to their inventories; doing so gives them control over the bankruptcy process, including assuring substantial cash flows to them at the expense of the 5-10% of claimants who have actually suffered injury. This control has led to the “pre-packaged bankruptcy”—which, in its current form, is a further perversion of legal process. Let me give you a composite example.
Lawyers single out a peripheral defendant which has extensive insurance coverage and take that defendant to trial in one of the “magic” jurisdictions. Injury is not requisite. The jury awards $10 or $20 million in damages. Suddenly, that defendant is a target and knows that similar valuations of pending asbestos claims which it was previously quietly settling for $1000 apiece, will quickly lead to bankruptcy.
Plaintiff lawyers then approach the defendant and make an offer it can’t refuse: agree to do a “pre-pack” and we will allow you to keep most of your assets; all we want is the insurance coverage. The defendant, of course, accepts. As part of the price, plaintiff lawyers demand that defendant first settle a large number of pending cases for highly inflated values, with payment to come from insurance coverage. Plaintiff lawyers also instruct the defendant to hire a particular law firm to facilitate the “pre-pack.” The two law firms then proceed to draw up the Plan with little or no input from the defendant. At that point, defendant is indifferent to whether the claimants are sick or even whether their only exposure to its products was seeing pictures of them in loose-leaf notebooks compiled by plaintiff lawyers. All the defendant cares about is getting the 75% approval to bulletproof it against future claims. Plaintiff lawyers representing the “un-sick” control the vote and therefore whatever they say goes. In one case, they demanded settlement of 95% of the inflated value of each such claim. This allowed them to continue to vote these settled claims in favor of the Plan even though these claims consisted only of the 5% stub deliberately left unpaid.
For these efforts, plaintiff lawyers now demand that the defendant “ tip” them for their successful efforts in gaining the 75% approval. One such ‘tip” that was paid was $20 million. Even larger “tips” have been sought.
Already bankruptcy trust assets exceed $10 billion and that amount will double or triple over the next few years as 15-20 companies now in bankruptcy, including Owens Corning, W.R. Grace, Armstrong World Industries, G-I Holdings (the former GAF), and Babcock & Wilcox, establish such trusts. Soon 20 to 30 of these “piggy banks” with $20-$30 billion in assets will be in place which plaintiff lawyers will be able to tap at will.
On the basis of my research, it appears likely that plaintiff lawyers who typically submit claims on behalf of each of their clients to each and every trust as well as a few dozen other defendants, are asserting exposure statements that are inconsistent. That is, they are asserting exposure to certain products at a certain work location for a certain time period when making a claim to trust A, and then for the same plaintiff, they are asserting an inconsistent work history and exposure statement to trust B, and so on.
If this is occurring -- as I believe it is -- the evidence sits in the computer files of the asbestos trusts. But plaintiff lawyers control these trusts. No matter how inculpatory that evidence, the civil justice system is simply incapable of penetrating the inner sanctum of asbestos trusts. The only way that evidence could be accessed would be through investigative grand jury processes which will only come about if there is a public outcry. And that means that there has to be press attention. So long as the press continues to largely ignore the issue of asbestos bankruptcy proceedings, however, it will be business as usual in asbestos bankruptcies.
Two pending developments, also bear mention:
As many of you are aware, the Senate Judiciary Committee reported out a bill (S.1125) that would move asbestos claims into an administrative arena, funded by approximately $115 billion obtained from asbestos trusts, solvent defendants and insurance companies. Though this legislation would continue to allow payment of specious claims and in the case of lung cancers, would actually go beyond the current tort system, plaintiff lawyers and their retinue in the Senate oppose it. Though plaintiff attorneys commonly charge 40% contingency fees in asbestos cases, even when the cases are settled wholesale in groups of hundreds and even thousands, the bill does not attempt to cap fees. So why are the lawyers opposed?
Recall, as I indicated, that they assert claims on behalf of each client in their inventories who are recruited by screenings, against each of the bankruptcy trusts and a few dozen or more of the solvent defendants. Even if they only collect a few hundred to a few thousand dollars per claim, it adds up. For a single claimant, one without any asbestos-related illness recognized by medical science, this can amount $60,000, even as high as $100,000. Under the proposed bill, the “un-sick” will have their claim values capped. Passage of the bill would therefore wipe out billions of dollars in current inventory claim value because the amounts already received for many of these inventory clients exceed the statutory caps.
The other development of note is an appeal currently pending before the Third Circuit Court of Appeals of the denial of a motion to recuse Judge Alfred Wolin, a federal distinct court judge appointed to oversee the bankruptcies of five asbestos defendants. The decision of that court is likely to have a profound impact on the practices I have described. Judge Wolin has consistently ruled in favor of plaintiff lawyers, overruling bankruptcy judge decisions which the plaintiff lawyers opposed, ratifying the very practices I have just pointed out, and hiring plaintiff lawyers and others with a financial interest in maintenance of the status quo to advise him as to his rulings. The evidence advanced in favor of removing Judge Wolin is both revealing and compelling. If the Third Circuit does order his removal from presiding over these cases, it will be seen as a signal to the bankruptcy courts to exercise judgment independent of the plaintiff lawyers’ demands. Conversely, if the court turns down the appeal, it will be seen as an imprimatur of the corruption of process that characterizes aspects of asbestos bankruptcy proceedings. All eyes then are on the Third Circuit. When it issues its opinion, it will be duly reported in the national press. But I would not hold my breath in anticipation of any in-depth analysis of what is happening in asbestos bankruptcy proceedings. In fact, it is safe to predict that no matter how great the perversion of legal process, asbestos bankruptcy proceedings and litigation will continue to fly below the press’s radar -- which good for plaintiff lawyers but bad for the national polity.