Among the often overlooked effects of the national tragedy of asbestos-related diseases and litigation is the impact on current officers and directors of mining and manufacturing companies. Faced with the legacy of policies and practices over which they had no control and whose consequences were unknown and unforeseeable even by their predecessors, these officers and directors confront a maze of difficult and sometimes drastic corporate options as well as significant personal financial risk. As counsel for the inside directors of the Manville Corporation, we are particularly cognizant of the overwhelming problems besetting asbestos management and any company involved with massive, contingent, unliquidated claims that are subject to the vicissitudes of our litigation system. In this presentation, which suggests an industrywide, government-assisted superfund as the fairest resolution to all parties concerned in the asbestos dilemma, we rely exclusively on public record information and express our personal views and not necessarily those of our clients or our law firm.

The Magnitude of the Asbestos Problem

The recent bankruptcy filings of several asbestos manufacturers have focused attention on the deluge of litigation stemming from occupational exposure to asbestos dust. But even this publicity has not conveyed the staggering dimensions of the problem. According to the National Cancer Institute, at least 4 million American workers have been exposed to hazardous levels of asbestos dust in their working place since the 1940s. The Cancer Institute estimates that at least 1.6 million will die from cancer attributable to that exposure. Many other estimates are lower — from 62,000 up to 300,000 over the next two to three decades — but still are extraordinarily high. In addition, 160,000 more people may contract asbestosis, a nonmalignant but permanent scarring of the lungs. Clearly, the problem has reached catastrophic proportions.

Many of these individuals were last exposed to asbestos between twenty and forty years ago. At that time, the U.S. Public Health Service standard for the safe level of exposure was, tragically, too high. Studies at the time indicated that workers handling products containing dilute asbestos were not at risk. Not until 1964, when Dr. Irving Selikoff published his pioneering research, did it become clear that [14 ELR 10128] such workers, in addition to those who handled raw asbestos fiber, faced serious health hazards. And not until 1968 did the responsible governmental authorities recommend a more restrictive exposure standard — a level that has since been restricted even further.

The state and federal workers' compensation systems have not dealt adequately with this problem. Many states prohibit recovery for asbestos-related diseases. Others provide benefits for partial disability but bar any adjustment if the disease worsens, as asbestosis may do. Payments under workers' compensation frequently are based on the worker's income at the time of employment many years prior to his claim, when wages were much lower than today. As of 1980, the Department of Labor reported that workers' compensation benefits replaced only one-eighth of a disabled worker's lost wages. To label such payments "compensation" is to overstate them.

Because of these inadequacies, many disabled workers or thier survivors have bypassed workers' compensation and sued asbestos manufacturers directly. In addition, some states allow so-called direct actions against officers, directors, and employees of the companies. The current volume of this asbestos litigation, based on corporate conduct undertaken several decades before, is unprecedented. It surpasses all automobile accident litigation across the country before the adoption of no-fault insurance laws. Indeed, more than 30,000 asbestos cases are now pending.

At the time it filed for bankruptcy, the Manville Corporation, the largest asbestos miner and manufacturer, was a defendant in 16,500 asbestos-related cases, and 500 new cases were being filed each month. These include hundreds of direct suits against officers, directors, employees, and other agents. A statistical study commissioned by Manville predicted that 50,000 plaintiffs, exposed over 40 years, would sue the Company or its agents by the year 2000. The potential liability is now estimated to be at least $2 billion and perhaps as much as $5 billion.

Dr. Selikoff has stated that the overall liability of all parties in asbestos litigation will be between $ 40 and $ 80 billion. This is a liability that the asbestos companies certainly did not anticipate at the time the products in question were sold, and for which current officers and directors — some of whom have been sued directly — bear no responsibility.

The flood of asbestos cases has overwhelmed the judicial system. There have been backlogs of thousands of cases in some judicial districts. Moreover, there have been dramatically inconsistent results from case to case. Some background on these cases illustrates this point.

Usually, the central issue in litigation is fault: did the asbestos companies know, or should they have known, in the 1940s and 1950s about the hazards of low doses of asbestos dust? The asbestos companies say no, and they have won a substantial percentage of the cases, based on a "state-of-the-art" defense. Citing the standards issued by the Public Health Service as well as other medical research available at the time, they argue that they acted consistent with existing medical knowledge. Although improved research techniques proved the doctors wrong, the companies — as well as the current officers and directors — contend that they cannot be blamed for the limitations of medical technology forty years ago.

Based on this state-of-the-art defense, some juries have awarded disabled workers no compensation, while other juries, considering the same technical data, not only have rejected the defense but also have assessed punitive damages. Indeed, in one case in Texas, five juries sat simultaneously, heard the same evidence, and reached different verdicts ranging from no liability to punitive damages. The unfairness of such a system is manifest.

Class actions are not the answer. Despite many attempts, not one class has been certified. The courts have held consistently that the individualized issues in each case regarding the level of exposure to asbestos, the length of exposure, the type of asbestos, dust involved, and so on make class treatment inappropriate.

The unfairness of case-by-case litigation is not offset by any efficiencies. Litigation is costly and time-consuming, requiring years of preparation and, frequently, weeks of trial. Moreover, most of the workers' recoveries go to pay their attorneys' and expert witnesses' fees, and money that could be used to compensate workers pays for the asbestos companies' defense costs. Estimates are that only 10 to 20 cents of every dollar spent on the asbestos cases ultimately found its way to the victims. The rest went to lawyers and experts. Bleak House lives on!

Obviously, the burden of defending these cases and the enormous liabilities have strained the resources of the asbestos companies. Although the companies for the most part are insured, as are their officers and directors, the insurance carriers are litigating with each other and with the insureds to determine the appropriate theory of coverage — that is, who pays what to whom. Fifteen cases are pending. The insurance litigation in California has been described as one of the largest cases in judicial history. Manville alone has produced more than 97 tons of documents. The net result: more resources that could be used to compensate asbestos victims are being thrown away on lawsuits. And many manufacturers have been forced to shoulder their own, their officers' and directors', and their insurers' shares of the asbestos defense costs and liabilities until the dispute is resolved.

Moreover, although approximately half of the pending cases have been brought by shipyard workers, who were employed by the government or its contractors, the government has steadfastly asserted its immunity from suit. Thus far, this defense has prevailed, although the recent decision of the Supreme Court in Lockheed Aircraft Corp. v United States¹ could change that situation. In Lockheed, the Court held that although the Federal Employees Compensation Act barred suits against the government by an injured employee, a third party sued by that employee could seek indemnity against the government. Lockheed was not an asbestos case, however, and, at least to date, the asbestos companies have borne the full force of the staggering costs and liabilities in those cases. There are serious questions as to their continued ability to pay.

Securities Litigation Presents Additional Complications

As noted, in some states officers and directors have been sued individually for their companies' long-distant actions with respect to asbestos. But that is not all. They face additional exposure under the federal securities laws. Facing these massive liabilities for asbestos-related diseases, the publicly held asbestos companies had an obligation under the securities laws to make some disclosures. But disclose [14 ELR 10129] what? In the earlier years, the late 1970s, there were relatively few asbestos cases. The asbestos companies' win/loss record in trials was good, and no punitive damage awards had been assessed. The companies disclosed what they believed to be the case — that the asbestos liabilities would not be financially material.

In the early 1980s, the number of cases grew exponentially. The potential future liabilities began to appear more significant. Yet, how could the companies reliably estimate the number of people who would sue them over the next twenty years, how successful they would be, how much legal costs would rise, and how the insurance companies would react, among other questions? How could they conduct valid statistical studies until there were enough cases to form a data base? In short, beyond the suits on file and the amounts of these claims, what was it they could or should have disclosed or predicted?

This area is really a minefield. For the asbestos companies to have estimated liabilities that proved too high arguably could have depressed the price of the stock and fueled lawsuits by those who sold their shares. If they disclosed estimates that were too low, it arguably would have raised the price of the stock artificially, to the detriment of persons who held onto their shares, fueling lawsuits by these shareholders.

What at least one company has done since 1981 is simply to state the facts, that it could not estimate the potential liabilities, but that it expected them to be substantial. The securities laws can require no more. But, predictably, there is more litigation, and since some asbestos companies are in bankruptcy and thus are immune from suit, that security litigation has been directed against officers and directors individually as controlling persons of the companies. This litigation, with "20/20" hindsight, faults the officers and directors for not knowing, at a time when it was impossible to know, that the asbestos liabilities would someday prove so substantial as to precipitate bankruptcies. We believe this type of suit is simply an extortionate exercise in second-guessing.

Is Bankruptcy a Workable Option?

Apart from disclosure obligations, management is faced with the excruciating problem of how to handle the morass of litigation and balance the best interests of shareholders, employees, trade creditors, present health litigants, and unidentified but anticipated future health claimants. It is difficult for an apparently thriving business to contemplate bankruptcy even when faced with potentially ruinous exposure in the relatively foreseeable future. Yet under the terms of the Bankruptcy Code of 1978, bankruptcy is becoming an increasingly considered option, albeit one fraught with difficulties.

Three asbestos concerns have filed for Chapter 11, Manville being the largest. The filing of these petitions has stayed all the asbestos litigation against the companies and brought it before the Bankruptcy Court. The Bankruptcy Courts also have stayed at least some of the actions, including some of the securities litigation, against officers and directors. The representatives of the asbestos claimants as well as some trade creditors in the Manville case have moved to dismiss the bankruptcy petition there as filed in bad faith. The court has not yet ruled on these motions.

Bankruptcy is now an option because the 1978 Code defined a creditor's claim that can be discharged in bankruptcy to include a "contingent" right to payment arising before the conclusion of the bankruptcy proceeding. This definition appears to embrace the claims of workers injured by exposure to asbestos well before the bankruptcy but whose injuries have not yet manifested themselves. As creditors, they have claims arising at the time of their injury that are contingent upon future proof.

On this reading of the statute, bankruptcy could provide a fairly effective method of compensating victims. The bankruptcy plan for the debtor could, for example, earmark a percentage of future earnings for a fund to pay a specified portion of estimated asbestos liabilities or provide for insurance to pay those liabilities. Future claimants could receive a pro rata share of their claims, minus a percentage for the attorneys' fees and administrative costs saved. The claimants' entitlement to benefits could be determined by courts or workers' compensation boards. Alternatively, the Bankruptcy Court could retain jurisdiction and try the cases itself, or appoint a panel of arbitrators or special masters. In our view, such a plan could benefit the claimants as well as the companies.

There are, however, substantial risks to the bankruptcy option. For example, the district court handling the bankruptcy of UNR Corporation, another asbestos company, ruled that future asbestos liabilities were not "claims" dischargeable in bankruptcy.² In the court's view, no claim actually would arise until the victim knew or should have known of his injury, an event which often would occur only after the bankruptcy was concluded. The court ruled further that only a contractual claim, not a tort claim, could be "contingent" as defined by the Bankruptcy Code. Finally, the court expressed doubt that it could certify a class of potential claimants, provide them adequate notice, and bind them to any judgment it might issue. The decision is on appeal. The same issues have been raised in the Manville bankruptcy, but the court there has yet to rule.

The UNR decision, if it stands, may defeat the purpose of bankruptcy for the asbestos companies. After enduring the disruption of business and the managerial trauma that bankruptcy entails, UNR now may not be able to adjust the future liabilities that lay at the core of its financial problems.

There are other potential drawbacks to the bankruptcy option. A debtor cannot be certain that the plan of reorganization ultimately adopted will be to its liking. Indeed, forced liquidation of the company is a possibility. Moreover, the landscape of bankruptcy remains perilous as a result of the Supreme Court's Marathon decision declaring unconstitutional certain jurisdictional aspects of the new Bankruptcy Code.³ The implications of that decision are not yet fully resolved. And, by failing to amend the unconstitutional features of the statute, Congress has inexcusably let this situation languish.

Moreover, we should not underestimate the companies' resistance to bankruptcy. Justified or not, there is a stigma attached to bankruptcy. An executive who has spent his working life building up a company may perceive bankruptcy as a personal defeat. Further, the executive must be [14 ELR 10130] concerned about employee morale and the ability of the company to function after the bankruptcy petition. He must worry about the company's standing among its customers and creditors.

Legislation Is a Superior Approach

Bankruptcy, then is an ad hoc solution, a refuge of last resort — and an uncertain and unattractive refuge at that — for companies threatened with financial disaster by the asbestos litigations. A legislative approach that addressed the problem directly would, in our view, be far superior. A number of legislative proposals were introduced in the 97th Congress, and others are being actively discussed. Without reviewing them individually, we focus on some of their features which are critical to just, fair and effective legislation.

First, legislation should substitute a defined benefit plan for the open-ended liabilities the asbestos companies face in litigation. The asbestos companies and others identified in the bill could contribute to a trust fund, which would make payments on a schedule dependent on the type of disease, the degree of disability, and other relevant factors. Granted, some workers might receive less under this program then they would at the hands of a jury. But all of those injured would be guaranteed payment. The rule of first come, first served would govern no longer.

Second, the determination of eligibility for benefits must be dealt with in a straightforward manner. One of the bills proposed incorporates presumptions — any disability due to asbestosis, mesothelioma or lung cancer would be presumed to be occupational, that is, asbestos-related, if the employee had been exposed to asbestos. With respect to the first two diseases, the presumption would be irrebuttable. This approach invites the same problems encountered with the Black Lung Benefits Act, where overbroad statutory presumptions resulted in payments to persons who did not have Black Lung. There is substantial question whether the medical evidence relating to asbestos justifies any presumption with respect to its role as acause of lung cancer, and certainly not an irrebuttable presumption with respect to mesothelioma. In view of these doubts, there appears to need to legislate a diagnosis where medical examinations will be required anyway and where the medical evidence in individual cases is usually clearcut. The determinations of eligibility can be made without difficulty by state workers' compensation boards or specially created panels.

Third, a critical question is who should bear the costs of this compensation fund. All would agree that the asbestos industry should shoulder a significant share of the burden. The heart of the issue is whether the federal government should pay a fair share.

In our view, the government bears a large measure of the responsibility for the current asbestos problem and should pay a commensurate portion of the costs. As noted, about half the cases pending involve workers in shipyards run by or under contract to the government. During World War II, the government listed asbestos as a strategic mineral and thereby controlled its use. Starting in 1937, the government specified the use of asbestos in Navy ships being built by or for it. Moreover, it was the federal government that promulgated an incorrect safety standard in 1938 for exposure to asbestos. It was the government that in 1943 established standards — inadequate though they were — for use of asbestos in its shipyards, and then proceeded to ignore them well into the 1970s. And it was the government that issued a report in 1946 which concluded, "asbestos pipe covering of naval vessels is a relatively safe occupation." (Emphasis added.)

Particularly in light of the recent Lockheed decision, it seems likely that the government will be held liable in future cases. Legislation should not exempt the government from these liabilities while leaving those who relied on its standards to bear the cost. If private manufacturers and distributors are to be held responsible for asbestos diseases, the government should not avoid responsibility.

A legislative solution should also not let insurance companies off the hook. The insurance litigation relates primarily to the apportionment of liability among the parties. No serious question exists that the insurers will have to make some reimbursement to the asbestos companies. And there is no reason to extinguish this liability. Legislation should end the protracted litigation and specify a formula for the insurance companies' participation in a compensation scheme.

Finally, legislation should provide the exclusive remedy for asbestos claimants, regardless of who the claimants are or whether they have already filed suit. Extinguishing litigation rights would not be an unconstitutional taking. The legislation merely substitutes one remedy, a defined benefit, for another, a contingent claim. Whether or not a suit has been commenced is irrelevant to the issue of whether the new remedy is adequate. Nor is there a valid Seventh Amendment claim. Congress may not deny a litigant a jury trial on his cause of action, but it need not allow the cause of action to be brought in federal court. Administrative tribunals deal with many claims that might require a jury if brought in federal court. As to the state court cases that the defined benefit system would replace, the Seventh Amendment does not apply.

There are now 30,000 suits pending. These cases already tax the judicial system and generate enormous legal costs for asbestos manufacturers — money which otherwise could be used to fund a benefit plan and reimburse deserving recipients. No legitimate rationale exists for treating those who manifested disease earlier differently from those who do so later. If some sort of superfund is a better approach to the problem, we should make a clean break and impose that solution now.

It is quite significant that the American Bar Association has endorsed federal legislation to deal with the asbestos problem and has suggested that the federal government pay its share. The ABA's Special Committee to Study Product Liability noted in part in its report to the ABA House of Delegates that, "the unique national scope and magnitude of the problems for adequate compensation to injured parties and liability for occupational latent diseases as they affect the financial stability of a specific industry, such as asbestos, warrants attention at the federal level." (February 1983). The ABA accepted these conclusions. As we all know, lawyers benefit from increased litigation. So this is what the Federal Rules of Evidence would call "a statement against interest," which is a special indicia of trustworthiness. It merits careful consideration.

In sum, there has to be a better, a fairer, a more efficient way to deal with this tragic situation than the way in which we are dealing with it now. The legislative route offers the most promising opportunities. As a nation interested in fairness to all victims, we should not miss the most sensible and equitable solution.

1. Lockheed Aircraft Corp. v. United States, 103 S. Ct. 1033 (1983).

2. In re UNR Indus. Inc., Nos. 82B9841, 82B9851 (N.D.Ill. Mar. 25, 1983).

3. Northern Pipeline Constr. Co. v. Marathon Pipeline Co., 102 S. Ct. 2858 (1982).

14 ELR 10127 | Environmental Law Reporter | copyright © 1984 | All rights reserved