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 “placeholder” claims, a common tactic used by plaintiffs’ attorneys.  Some trusts currently allow claimants to file a placeholder claim, which contains no substantive information and in which the claimant does not actually seek payment, but merely seeks to toll the statute of limitations until they refile a claim at later date (presumably after the claimant’s civil lawsuit is resolved).  Moreover, the bill must still make it out of committee and through both the House of Representatives and the Senate: no small feat in today’s political climate.  Regardless, H.R. 4369 is a bold step in the right direction.