The Latest Asbestos Scam

Perhaps you thought the great asbestos legal blob couldn't get any worse, what with 100,000 new claims filed last year and 70 companies already pushed into bankruptcy. Well, read on. The latest asbestos scandal is threatening the integrity of the judicial system itself.

This new blob rolled into view in May when a federal appeals court dismissed a judge presiding over several high-profile bankruptcies. In legal circles, this almost never happens. So the Third Circuit removal of District Judge Alfred Wolin for a perception of bias toward asbestos lawyers deserves wider public attention. (More on that below.)

But let's first examine how trial lawyers have discovered a new venue for extorting asbestos money: bankruptcy court. This venue has been growing in popularity since 1994, when Congress fiddled with the bankruptcy code in a way that allowed trial lawyers to exploit asbestos bankruptcies.

It works like this: In a normal bankruptcy, a creditor's voting weight is mainly determined by how much he's owed. But thanks to the 1994 change, all asbestos "creditors" (claimants) are treated equally. That means the vote of a person who isn't yet sick counts just as much as the vote of someone who already has cancer.

It didn't take long for tort lawyers to figure out how to game this system. The leading asbestos law firms team up and pool their unimpaired plaintiffs (who each get a vote), draw up a plan that gives the bulk of the money to their clients, and then outvote the other creditors.

Another new bilking gambit is prepackaged bankruptcy. "Prepacks" have long been a popular way for companies to navigate bankruptcy. Creditors vote on a reorganization plan before the company even files for bankruptcy, thereby allowing a company to get quickly in and out of court. In asbestos prepacks, plaintiffs' lawyers have their clients quickly outvote other creditors and get paid before bankruptcy, then the lawyers get paid again for setting up the very plans that enrich them.

Consider the case of Combustion Engineering. The king of asbestos suits, Joe Rice of Motley Rice LLC, marshalled enough votes to approve a plan in which his unimpaired claimants will get a pre-bankruptcy payment as high as 95 cents on the dollar; those with cancer will recover what may be closer to 18 cents on the dollar. Better yet for Mr. Rice, in addition to taking a chunk of each of his clients' awards, he received a $20 million fee merely for getting this deal done. No wonder 291 cancer victims are appealing the judge's decision to accept the settlement.

Short of new legislation, the only check on this outrage are the judges charged with ensuring equitable bankruptcies. But so far only one has stood up to the asbestos bar: U.S. Bankruptcy Court Judge Randall Newsome struck down the AC&S prepack as "fundamentally unfair." He was especially unhappy to discover that AC&S's asbestos-claims processing (which makes judgments about which claims are allowable) and $2.4 million in fees had been subcontracted to a firm that had the same address as Mr. Rice's firm and whose only listed principal was a Motley Rice paralegal.

Keep in mind that we are talking about a very few trial lawyers who dominate this "business." Of 23 recent bankruptcies, Baron & Budd has been involved with the creditor committees of 15, Weitz & Luxenberg of 14, and Mr. Rice's firm of 11.

Which brings us to Judge Wolin, who had managed to hear five of the nation's biggest asbestos bankruptcies (not prepacks), including Owens Corning and W.R. Grace. His pro-plaintiff bias was apparent from the start, prompting commercial creditors to take the risky step of asking an appeals court to remove Judge Wolin from several cases for having created a "perception" of questionable impartiality.

The Third Circuit judges noted that Judge Wolin had routinely engaged in what is usually viewed as a judicial no-no: meeting ex parte (outside the courtroom) with the lawyers in the case, including Mr. Rice. According to one court document, Judge Wolin referred to his meetings with Mr. Rice and other attorneys in his appointment books as events with "the boys."

Then there were the 325 hours of private lunches, dinners and other meetings the attorneys had with the expert "advisers" Judge Wolin had hired to help him. It turns out two were representing a group of asbestos plaintiffs in another big bankruptcy case. That means the same folks advising Judge Wolin on his decisions could have benefited from those rulings down the road. One was even drafting legal opinions for the judge. For the record, Judge Wolin issued a press release objecting to the Third Circuit's decision and noting that it had said he'd done nothing "unethical or biased." He is, however, officially off the case.

It's bad enough that our runaway tort system has evolved from a forum to resolve disputes into a wealth redistribution scheme. But asbestos bankruptcy now looks like a rigged game with the outcomes all but pre-determined. If more judges can't resist this form of legalized corruption, then Congress should at least get to work repairing a bankruptcy code that allows such abuse.