On September 13, 2018, the Department of Justice (DOJ) filed its first ever Statement of Interest in the bankruptcy of an asbestos company, signaling that DOJ intends to prioritize fraud and mismanagement relating to asbestos trusts. The Statement, filed in the U.S. Bankruptcy Court for the Western District of North Carolina in the Chapter 11 proceedings for Kaiser Gypsum Company, asserts that the proposed trust plans lack adequate safeguards and indicates that DOJ will object unless the final plan better ensures transparency and prevents fraud. Below are three major takeaways from DOJ’s action:
- INCREASED DOJ INVOLVEMENT
DOJ’s press release on its Statement of Interest indicates that “[t]his is just one action the Department will take to increase the transparency and accountability of asbestos trusts.” The press release encourages reporting of fraud or mismanagement of asbestos trusts and states that DOJ “will continue to look for opportunities to increase the transparency of asbestos trusts and protect the interests of legitimate claimants and the United States.” Furthermore, DOJ’s action follows letters by 19 state attorneys general citing issues regarding transparency in the trusts, which indicates that DOJ is taking these concerns seriously.
- MORE SAFEGUARDS IN FUTURE TRUST PLANS
DOJ also stated that it will object to any plan in the case that does not meet the following criteria to ensure transparency and accountability and prevent fraud and mismanagement: required compliance with the Medicare Secondary Payer Statute; notification of claimants of their potential obligation to reimburse Medicare; prevention of excessive administrative costs and legal fees; avoidance of conflicts of interest in the Trust Advisory Committee; and prevention of payments to plaintiffs who cannot demonstrate exposure or made inconsistent claims in similar proceedings. Given this strong statement by DOJ, attorneys can expect them scrutinize and object to future plans that lack similar safeguards.
- POTENTIAL INCREASED OVERSIGHT OF EXISTING TRUSTS
DOJ’s press release also indicated that “[t]he Department will also investigate conduct related to asbestos trusts that is illegal under federal law.” Because the government bases its standing in the case on the entitlement to reimbursement of Medicare payments to trust claimants, it seems DOJ could also scrutinize whether existing trusts are adequately informing claimants of their obligation to reimburse Medicare. DOJ also noted “troubling concerns about the lack of oversight and operation of the trusts themselves,” which could indicate future plans to look into existing trusts. DOJ’s Statement also argues that not only should beneficiaries and courts monitor trusts, but that interested parties such as the United States should be able to do so as well, in addition to encouraging reporting of bad actors.
While it remains to be seen whether increased attention and oversight by the Justice Department related to asbestos trusts is a temporary or long-term occurrence, it appears the federal government may be making a point to prioritize fraud and mismanagement in this area. Please reach out to Mark Grider or Charles Fleischmann if we can be of assistance on matters related to Department of Justice investigations or enforcement priorities.