faulkFeatured Expert Column

by Richard O. Faulk, Hollingsworth LLP

There was a “shot heard ‘round the world” in asbestos litigation on January 9, 2014.  On that day, U.S. Bankruptcy Court Judge George Hodges for the Western District of North Carolina issued an important order finding that a “startling pattern of misrepresentation” and withholding of exposure evidence in asbestos lawsuits resulted in unfairly “inflated” recoveries.  See In Re Garlock Sealing Technologies, LLC, et al., No. 10-3167 (W.D.N.C., Jan. 9, 2014). With those findings, Judge Hodges firmly rejected the exaggerated claim values urged by plaintiffs’ counsel in a major Chapter 11 bankruptcy, and estimated the debtors’ liability at $125 million, approximately $1 billion less the amount asserted by the claimants.

This order will surely influence asbestos litigation throughout the United States.  Defendants in pending cases will press for full disclosure of settlements made with the bankruptcy trusts of insolvent companies – and Congress and state legislators will continue their quest for reforms to ensure complete disclosure of settlements to preclude exaggerated recoveries against peripheral defendants.  The House of Representatives has already passed H.R. 982 (the “FACT” Act), which requires asbestos trusts to publish claimants’ names and the nature of their claims  States such as Ohio and Oklahoma, have passed similar bills, and another is close to passage in Wisconsin.

But the path to reform has been long and incredibly costly. For many years, plaintiffs’ lawyers resisted disclosure of claims and settlements with the bankruptcy trusts. They resisted even though the claims might contain useful evidence of exposure to the bankrupt parties’ products, and although settlements might be used as credits or offsets against the solvent defendants’ liability. Without a meaningful way to offset insolvent companies’ settlements, defendants faced a “Hobson’s choice.” They could accept inflated settlement values – or risk judgments inflated by their inability to obtain offsets.  America’s courts, which expanded asbestos liability when “necessity” moved them to “change and invent,” see., e.g., Jenkins v. Raymark Industries,  782 F.2d 468, 473 (5th Cir. 1986), were largely nonresponsive to the injustice of this situation – as though the common law restrained change, rather than enabled adaptation and flexibility. See generally, Richard O. Faulk, Dispelling the Myths of Asbestos Litigation: Solutions for Common Law Courts, 44 S. Tex. L. Rev. 945 (2003). Inevitably, more defendants joined their insolvent brethren in bankruptcy – where claims and settlements were cloaked in mythical secrecy.

Judge Hodges, however, decided to lift the veil.  He allowed “full discovery” into selected cases to evaluate the exposure evidence available from bankrupt insulation companies. On examination, “each and every one” of the cases contained “demonstrable misrepresentation.” Slip. op. at 35.  He also allowed limited discovery into a larger sample of cases where “almost half of those cases involved misrepresentation of exposure evidence.” Id.  Thereafter, he observed that exposure evidence regarding the insulation companies’ products often “disappeared” as a result of “the efforts by some plaintiffs and their lawyers to withhold evidence of exposure to other asbestos products” and to “delay filing claims against bankrupt defendants’ asbestos trusts until after obtaining recoveries from Garlock (and other viable defendants).” Id. at 30.

Although “it appeared certain that more extensive discovery would show more extensive abuse,” Judge Hodges believed it was unnecessary “because the startling pattern of misrepresentation that has been shown is sufficiently persuasive.” Id. at 35.  He concluded that Garlock’s evidence demonstrated that “the last ten years of its participation in the tort system was infected by the manipulation of exposure evidence by plaintiffs and their lawyers.” That tactic had a “profound impact on a number of Garlock’s trials and many of its settlements such that the amounts recovered were inflated.” Id. at 26.

While Judge Hodges “made no determination of the propriety of that practice,” Id. at 38, Garlock was not so restrained.  To “comply with the Judge’s rulings” regarding confidentiality, Garlock filed a lawsuit “under seal” in which it “sued four prominent asbestos law firms for fraud.” See Embattled Gasket Maker Sues Asbestos Lawyers for Fraud.

After decades of litigation and scores of bankruptcies, there are many other “viable defendants” who lie on the fringes of liability. Surely, they should not be forced into insolvency before they are allowed to pursue evidence that is undeniably relevant to their liability.  It is time for judges and elected officials to ensure disclosure of all evidence necessary to protect parties from artificially inflated settlements and judgments.  Perhaps then, at least one of the myths of asbestos litigation can finally be dispelled, and this issue can finally be ruled by the fairness to which our system of justice aspires.