October 28, 2020 – The U.S. Trustee assigned to the Debtors' cases objected to the Debtors' Disclosure Statement [Docket No. 2427].

The U.S Trustee raises several interesting points which impact on these cases as well as on other asbestos-related cases. The U.S. Trustee's first objection centers on the Disclosure Statement's failure to note that section 524(g) trusts have been proven ripe for abuse and that fraudulent claims as to a fixed-amount monetary fund inevitably dilutes that fund for holders of legitimate claims, providing them with smaller recoveries in bankruptcy than they would have in a tort litigation context where non-malignant conditions would be weeded out. The U.S. Trustee notes that a large study of asbestos-related trusts (see further below) revealed that "persons who did not have malignant conditions accounted for 86 percent of all claims made to the trusts and 37 percent of all trust payments, notwithstanding that these claimants usually would not have been compensated at all for those injuries in the tort system." 

The second strand of the objection argues that informational deficiencies in the Disclosure Statement render the Plan "patently unconfirmable." Key amongst the U.S. Trustee's concerns is a failure to provide the singularly most important fact relevant to the only class of voting creditors (holders of talc injury claims): What it is that those claim holders stand to recover. The U.S. Trustee points out that not only do the "Initial Payment Percentages" remain nowhere to be seen, but that in place of concise, relevant information claim holders are provided with 100 (plus) pages of a legalese blizzard in the form of the Trust Distribution Procedures’ (the "TDPs") and the Trust Agreement. just not good enough insists the U.S. Trustee.

The objection notes, “The Disclosure Statement cannot be approved for two main reasons. First, creditors are not provided with adequate information as required by section 1125 of the Bankruptcy Code. The Disclosure Statement does not disclose or explain the Third Amended Joint Chapter 11 Plan’s (the ‘Third Amended Plan’) lack of safeguards against fraud or abuse. Nor does it explain or justify that, under the Third Amended Plan, numerous claims may be paid that would not have been viable and that have not historically been paid in the tort system — thereby subjecting all other legitimate claimants to a risk that their claims will be diluted.

Second, the Third Amended Plan described in the Disclosure Statement will not be able to satisfy the confirmation requirements of 11 U.S.C. § 1129 because it fails to include adequate safeguards against fraud and abuse… (‘[A] bankruptcy court may address the issue of plan confirmation where it is obvious at the disclosure statement stage that a later confirmation hearing would be futile because the plan described by the disclosure statement is patently unconfirmable’).

Under the Third Amended Plan, Class 4, the ‘Talc Personal Injury Claim’ holders are the only voting class. The centerpiece of the proposed Third Amended Plan is a trust (the ‘Trust’) that will adjudicate and pay all current and future Talc Personal Injury Claims, and a Channeling Injunction that will permanently enjoin holders of Talc Personal Injury Claims from taking any action to recover on their claims directly from Imerys or any of the ‘Protected Parties’ other than through the Trust.

The Trust will be established under the terms of the ‘Ivory America Personal Injury Trust Agreement’ (the ‘Trust Agreement’), found at D.I. 2184-2. The Trust will adjudicate claims pursuant to the ‘Ivory America Personal Injury Trust Distribution Procedures’ (the ‘TDPs’), the most recent version of which was filed on October 19, 2020 and is found at D.I. 2370. While the Plan Proponents have finally filed these two crucial documents, other important information, upon which Class 4 claimants will rely when determining how to vote on the Third Amended Plan, remains unknown.

By way of example, the ‘Initial Payment Percentages’ that are to appear in section 4.2 of the TDPs are still missing. The TDPs acknowledge that the Talc Personal Injury Claimants will rely on these percentages when determining how to vote on the Third Amended Plan. (TDPs, § 4.2). However, five (5) months after Debtors filed their original plan, this critical information remains undisclosed. In addition, the Disclosure Statement still does not provide any disclosure of the terms of the Trust Agreement or the TDPs to the Talc Personal Injury Claimants. Rather, the Class 4 claimants are supposed to analyze the forty (40) page Trust Agreement and sixty-five (65) page TDPs to determine how and what they may be paid if the Third Amended Plan is confirmed.

The U.S. Trustee also objects to one aspect of the proposed Solicitation Procedures because it creates an unwaivable conflict of interest. The Proposed Solicitation Procedures permit certain law firms to decide whether their clients will opt-out of giving third party releases whose beneficiaries include those very same law firms. In other words, these law firms will be deciding whether their own clients will be giving them a release. It also allows these law firms to decide whether to accept or reject the Third Amended Plan on behalf of their clients, when acceptance would foreclose any ability of their clients to opt out of giving such releases.”

Fraud Cases in Section 524(g) Context

The U.S. Trustee notes: "In 1994, Congress enacted 11 U.S.C. § 524(g), which created a comprehensive mechanism for addressing both existing and future injuries caused by asbestos. Under the terms of most section 524(g) plans, asbestos-related claims against the debtor are not liquidated or paid during the bankruptcy case but are instead channeled to a special trust created under the plan of reorganization, which then assumes responsibility for both the defense and payment of those claims. These trusts are managed by trustees, who often must secure support for major decisions from a 'trust advisory committee' whose members are often the same attorneys who represented asbestos claimants during the bankruptcy. See generally Dixon, McGovern, and Coombe, Asbestos Bankruptcy Trusts: An Overview of Trust Structure and Activity with Detailed Reports on the Largest Trusts, RAND Institute for Civil Justice, 2010 (the 'RAND Report'). Since 1994, more than 60 such trusts have been established by chapter 11 debtors with asbestos-related liabilities.  The proposed Third Amended Plan in these cases is typical in most respects of the plans filed in these earlier cases.

In recent years, both courts and researchers have noted a growing number of concerns with the operations of many of these trusts, particularly as they relate to fraudulent claims filed both within and outside the bankruptcy system. In 2010, the RAND Corporation conducted a comprehensive study of the 26 largest asbestos trusts then in operation, which at the time accounted for approximately 99% of all asbestos trust payments…..Among other findings, the RAND Report found that over the study period, persons who did not have malignant conditions accounted for 86 percent of all claims made to the trusts and 37 percent of all trust payments, notwithstanding that these claimants usually would not have been compensated at all for those injuries in the tort system.

A hearing on the objection is scheduled for November 16, 2020.

Read more Bankruptcy News