Debevoise & Plimpton

Court rules that Garlock’s settlement history does not accurately represent its actual asbestos liability

By Maura Kathleen Monaghan, My Chi To, Mark P Goodman, M Natasha Labovitz and Amanda B Kernan

On 10 January 2014, in a closely watched case, judge George Hodges of the Bankruptcy Court for the Western District of North Carolina ruled that Garlock Sealing Technologies is only liable for a fraction of the asbestos liability alleged against it by current and future mesothelioma claimants. This noteworthy ruling highlights a disturbing pattern: prominent plaintiffs’ firms would sue Garlock and elicit testimony from their clients, vehemently disclaiming knowledge of any other source of asbestos exposures, while filing claims on behalf of the same plaintiffs seeking compensation from the bankruptcy trusts of the companies that made the products the plaintiffs denied ever encountering. The result was to inflate Garlock’s liability by making it appear that Garlock’s product was the sole or major source of the plaintiffs’ exposure. Defence counsel have long suspected this practice, but the unmistakable proof of what a recent New York Times editorial referred to as ‘The Asbestos Scam — Part 2’ should give asbestos defendants greater leverage in negotiations both inside and outside of bankruptcy. The Garlock case also provides a playbook for companies whose recent settlement or verdict experience overstates the true liability picture to estimate the appropriate contribution to a bankruptcy trust based on black-letter legal principles and the unique characteristics of the relevant products instead.

Since the 1980s, manufacturers of asbestos-containing products have faced overwhelming asbestos-related costs that have led the majority of these companies to seek protection under Chapter 11 of the Bankruptcy Code. Section 524(g) of the Bankruptcy Code authorises a debtor to create a trust for present and future asbestos claimants as part of a reorganisation plan. A bankruptcy court may then enjoin asbestos claimants from suing the debtor and certain third parties and ‘channel’ their claims to the trust…

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