Trusts Busted: How Lawyers Defraud Trust to Pay Injured People

From the WSJ:

Harry Kananian died in the year 2000 of mesothelioma -- a cancer almost always caused by asbestos. But the legacy that may survive him is the role he is posthumously playing in exposing evidence of asbestos litigation fraud.

In early 2000, the Ohio resident met with the law firm of Early, Ludwick, Sweeney & Strauss to see about collecting compensation from special trusts set up by companies to deal with asbestos liabilities. So the law firm filed a claim to one trust, saying Kananian had worked in a World War II shipyard and was exposed to insulation containing asbestos. It also filed a claim to another trust saying he had been a shipyard welder. A third claim, to another trust, said he'd unloaded asbestos off ships in Japan. And a fourth claim said that he'd worked with "tools of asbestos" before the war. Meanwhile, a second law firm, Brayton Purcell, submitted two more claims to two further trusts, with still different stories. The two firms swept up as much as $700,000 for Kananian and his estate from trusts and settlements.

In the legal trade, this is known as "double dipping" -- the process by which lawyers file claims at many different bankruptcy trusts on behalf of a single plaintiff. Each trust is told a different story about how the client got sick, and the plaintiff collects from all of them. Of course, the lawyers collect too. This practice may well have remained unexposed had not Brayton Purcell decided to cash in on Kananian one more time. It sued Lorillard Tobacco, this time claiming its client had become sick from smoking Kent cigarettes, whose filters contained asbestos for several years in the 1950s. That suit has now exploded on Brayton, exposing one of the asbestos bar's more lucrative cash cows.

In Cleveland, Judge Harry Hanna of the Cuyahoga County Court of Common Pleas has been asked to rule on a motion to disqualify Brayton from the suit and bar it from practicing in Ohio. The firm stands accused by Lorillard of lying to the court, defrauding asbestos trust funds and obstructing discovery. Those accusations come via a raft of internal emails and documents, most if which are referred to in the court record, that tell a story of two law firms using contradictory stories to rake in money from bankruptcy trusts, then potentially trying to cover it up. All parties are under a gag order from the judge. Last week, Brayton Purcell, amazingly, requested to withdraw itself from the case.

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As the tort bar piled on endless -- and often bogus -- asbestos claims in the 1990s, many defendant companies started looking for a way out. One solution was to go into bankruptcy, turn over a huge chunk of money to an asbestos "trust," and emerge from Chapter 11 clear of asbestos woes. These trusts are responsible for one of the largest wealth transfers in history, shifting billions from companies and insurers to plaintiffs lawyers and their largely healthy customers. A number of large trusts are due to come online over the next year alone, with assets of $30 billion.

Many trusts are run by the very lawyers who created them; that is, once the trust is created, the defendant company is no longer involved with claims, and the trial lawyers divvy up the money. These lawyers, because their contingency fees are based on the trust's payouts, have no incentive to ensure that applicants for compensation were actually harmed by that particular trust's product. While it is not illegal to file at different trusts (and some industrial workers were exposed in multiple ways), most such claims are vague or contradictory. Trust payments are also considered legal settlements and thus confidential. So while the asbestos bar may wrongly double dip, this is usually hard to prove.

Harry Kananian met with the firm Early Ludwick in February 2000. According to an Early email, he wasn't clear how he'd been exposed. He had, however, served in the Army in World War II and remembered several months on troop ships known to contain asbestos. On one such two-week trip he'd done welding. He also recalled working in a factory that was "dusty," as well as a "white powdery substance" when he was remodeling his house.

Early Ludwick then filed its multiple claims -- to the 48 Insulations trust, the Eagle Picher trust, the UNR trust, the Celotex trust and others. Brayton Purcell was also retained by the plaintiff and filed claims to Johns Manville and Bethlehem Steel. The discrepancies were never questioned until Brayton sued Lorillard Tobacco, and Brayton probably never thought the prior claims would be an issue. But Lorillard suspected Kananian had already collected on the basis of his work history -- and it argued the jury had a right to know. To Brayton's dismay, Judge Hanna agreed earlier this year.

When Brayton's lead counsel, Chris Andreas, started to realize in February that Judge Hanna would allow the claims as evidence, his first strategy was to sell Early Ludwick down the river. Mr. Andreas seemed to hope that, if the judge thought Early's work was erroneous, he wouldn't allow the claims into court, where they might sway a jury. Mr. Andreas said in court that the Early claims were "flat incorrect," "simply inaccurate," "absurd" and "the most misleading information that [he'd] ever seen." The judge was unmoved.

In a March 10 email, Mr. Andreas relates the bad news to his partners, and explains the problems with the original claims. To give one example: In the UNR claim (which stated Kananian had unloaded asbestos off ships), Mr. Andreas says that, in fact, Kananian only supervised Japanese workers who'd unloaded ships. Also, "there is absolutely no evidence that anyone shipped or unloaded Unibestos [a UNR product] on any of ship [sic] he was involved with during this period, least of all Mr. Kananian himself." The rest of the Early claims had similar problems, he said, admitting that in one of Brayton's own claims "we also overstate Mr. Kananian's exposure . . ." In a separate email he states, "there is no way what our client sent them matches what they put in these forms."

Mr. Andreas worries that "I am forced to try to explain them away as mistakes by clerks or [attorneys]. A jury is going to look down on this type of fabrication by lawyers and can use this information to dump plaintiffs by finding that." He then offers a choice: They can give the money back, in which case Judge Hanna won't allow the claims, or they can "go forward at trial" and try to get the jury to focus on something other than "unsworn claim forms that were just used to pry money out of a bankrupt" (my emphasis). The goal, he says in another email, is to "blame [Early] for bulls----ing the trusts."

Meanwhile, Lorillard was trying to subpoena the confidential trust claims. Brayton knew the judge would go ballistic if it tried to officially squelch this process, so instead it worked behind the scenes. When the Celotex trust informed the law firms that it had received a subpoena, and asked whether they would try to legally block the subpoena, one outside lawyer suggested they "respond to [Celotex] via phone requesting that they resist . . ." Mr. Andreas noted: "I would love if Celotex gave these a--holes a hard time."

When it became clear Lorillard would get its way, the strategy changed again. Brayton Purcell decided it would work with Early Ludwick to submit amended claims to the trusts. In Brayton's original claim to Johns Manville, for instance, the form had described Kananian as a "laborer" who had direct contact with asbestos. It also said he'd worked in "shipyard construction/repair" and listed several Manville products, by name, to which he'd been exposed. The amended claim instead listed Kananian's occupation as "other," noted that he'd only been on board a ship where Manville products were installed, removed any reference to shipyard work, and deleted any Manville products. Other trust claims were similarly purged.

But Brayton Purcell had a problem. It needed to change the forms to bolster the Lorillard suit, but it didn't want to raise alarms at the asbestos trusts. Its solution was apparently to try to make sure the trusts didn't look closely. Even as Mr. Andreas was telling his partners that the original Early claims were "fictional," he instructed those working on the new claims to tell the trusts they were only "correcting some clerical errors." Partner Al Brayton instructed his staff, according to an email, to "simply re-do the old claim form with the new answers and submit with a cover letter. Do not call them."

By spring, Judge Hanna was getting suspicious. To the firms' dismay, he took the rare step of allowing Lorillard to depose its opponents. Brayton Purcell emails show it wondering if the former office assistant who'd prepared the original Manville claim was "disgruntled." Mr. Brayton had already instructed an underling to "immediately brief all personnel preparing claim forms or efficiency responses that they are not to 'make up' information to make a claim qualify." But the firms continued to obstruct, and the judge had enough. This summer, he ordered up their emails.

Among other things, the emails show that raise questions about Mr. Andreas's candor with Judge Hanna. On March 10, Mr. Andreas told the court that he didn't know if the original Early Ludwick claims had even been submitted to the trusts, and said he would "welcome" documentation showing they had. In fact, on March 3 -- a week prior to Mr. Andreas's statement -- a paralegal at Brayton sent an email to Early Ludwick noting that "trial attorney, Christopher Andreas, asked that I follow up with your office on the total amount of settlements your office has obtained in this case." That same day, Early Ludwick sent back an email listing the trusts and how much money had been obtained from each. As for Mr. Andreas welcoming proof from the trusts, this was about the same time he was hoping Celotex would resist.

Then there's Mr. Andreas's knowledge of the claims. On March 23, he told Judge Hanna that his firm would "stand by" its original Manville form. In fact, the firm had submitted a revised claim the night before. When Judge Hanna found out, he asked if Mr. Andreas had known. His response: "I'll just tell you right on the record and I'll repeat it under oath at any other point, I did not know about it when we argued on [March 23]. I did not know it had been prepared." However, Mr. Andreas had been sent an email with the revised form on March 22 -- the night before his "stand by" comment -- and had replied, only two hours after receipt.

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Lorillard laid most of this out in a motion requesting that the judge dismiss the case, bar Brayton Purcell from Ohio, and turn the information over to the Justice Department. Lorillard is insisting the original claims were accurate, although Harry Kananian's real history remains the great mystery here.

Brayton Purcell in November filed a 101-page document, arguing that Kananian's mesothelioma was caused by the "total dose of inhaled asbestos from all products," including Kent cigarettes. Regarding its desire to alter the claims, it said it believes the jury had a right to accurate evidence. It addressed one issue, claiming that "while it may be true" that Mr. Andreas knew about the amended claim form even as he said he "stood by" the original, his statement related to the "overall accuracy" of that original. Then, last week, it filed a motion asking to be withdrawn, although it said it was doing this to help its client, not because of the allegations. Mark Abelson, of Campagnoli, Abelson and Campagnoli, an attorney for Brayton Purcell, says: "At this point in time, we don't believe that the Brayton Purcell firm had done anything wrong. It is my belief that Lorillard is making every attempt to create tangential issues to the litigation that will delay and deflect any actual trial on the merits of their own conduct." Early Ludwick had no comment. Lorillard did not return a call.

Judge Hanna has continued to push back the trial date until the claims issue is resolved. A hearing is set for this week, and it isn't clear he'll allow Brayton to withdraw and thus escape any further scrutiny.

Whatever happens, the exposure of this trust scam is bolstering a new wave of oversight. Judges are already taking a closer look at silicosis claims and "prepackaged" bankruptcies -- both cash cows for the trial bar. Just last week, a separate Ohio judge ruled that an asbestos plaintiff must turn over any prior claims to a bankruptcy trust. Similar rulings have been handed down in Virginia and California.

Meanwhile, reform proposals are beginning to emerge. One idea is for the trusts to release data about claimants, so that other trusts and defense attorneys can review existing claims. Some lawyers are requesting that active litigation be put on hold until companies can see who claimed from trusts. That this hasn't already happened is the fault of bankruptcy judges, who have been unresponsive to requests for more oversight of the trusts they help create.

A cleaner system would help true victims. Some lawyers for mesothelioma victims feel the need to file many claims because trusts are drying up -- making it difficult to get decent compensation. The feeding frenzy by plaintiffs lawyers who cash in repeatedly, often on behalf of plaintiffs who are entirely healthy, often leaves little for those who are truly ill. It isn't justice: It's fraud.