Government Says Bankrupt Manufacturer’s Asbestos Payout Plan Is Ripe for Abuse

By: Katy Stech Ferek & Sadie Gurman

The compensation plan for people who said they were sickened by asbestos in cement products made by Kaiser Gypsum Inc. doesn’t do enough to protect against fraudulent claims, said Justice Department officials who want more power to monitor the payout process.

In court papers filed Thursday, the Justice Department said the proposed plan to compensate thousands of people who have filed asbestos-related claims against Kaiser Gypsum “lacks sufficient safeguards” to detect fraudulent claims from people who aren’t ill or otherwise harmed by the toxic substance. The company and its affiliates have been named in more than 38,000 asbestos-related lawsuits since 1978, the year that the now-defunct manufacturer sold its operations.

Without oversight, the company’s proposed trust could pay “potentially millions of dollars of personal injury claims, with little continuing supervision by this court and with little ability for interested parties to prevent—or even detect—fraud, abuse, or mismanagement,” Justice Department officials said in a statement filed in U.S. Bankruptcy Court in Charlotte, N.C.

Justice Department officials cited a 2010 study from nonprofit think tank Rand Corp. that found that 86% of claims filed to get money from the country’s 26 largest asbestos trusts were from people who had asbestos-related lung illnesses but didn’t have cancer. The Justice Department said people who have noncancerous lung illnesses usually shouldn’t be compensated but have, in fact, been paid by trusts.

The filing comes amid growing concern about fraud in the asbestos bankruptcy trust system.

Last year, a group of 19 state attorneys general urged U.S. Attorney General Jeff Sessions to investigate whether any fraud has occurred, and lawmakers also have been seeking changes to the bankruptcy trust system. The Kaiser Gypsum case presented the first opportunity for the Justice Department to intervene, officials said. As part of the initiative, the department is encouraging people to report potential misconduct.

The U.S. bankruptcy code allows companies under court protection to form and fund trusts designed to compensate asbestos victims. A 2011 report from the U.S. Government Accountability Office estimated that the trusts established in bankruptcy cases had paid about $17.5 billion on more than 3.3 million claims from victims from 1988 to 2010.

Kaiser Gypsum stopped operating in 1978 and has solely focused on dealing with asbestos claims since then. It entered bankruptcy protection in September 2016 with plans to set up a trust to deal with thousands of asbestos-related lawsuits. The filing came shortly after a jury awarded $8.75 million in damages to an Oregon carpenter who was diagnosed with asbestos-related cancer.

The company submitted its plan to create and administer the trust two months ago. It still needs approval from Judge J. Craig Whitley.

In Thursday’s filing, Justice Department officials said the plan is missing important details on how asbestos claims will be evaluated, paid and reported. They want the power to see who has filed claims and received payments from the trust as an added safeguard.

The government has an interest in protecting against fraud because some people who get money from Kaiser Gypsum’s trust will have an obligation to reimburse Medicare for health-care costs, they said. Money paid to fraudulent claims drains the pool of money that claimants use to reimburse the government insurance program.

Kaiser Gypsum representatives didn’t immediately respond to a request for comment on the Justice Department’s filing.

Officials at the U.S. Chamber of Commerce praised the department’s statement, calling it a “historic step to confront the systemic fraud and mismanagement in asbestos litigation” in a press release late Thursday.

Asbestos was used in an array of building and industrial products for many years before it was banned in the 1970s. Illnesses can take decades to manifest, according to the Centers for Disease Control and Prevention, so lawsuits over asbestos damages have outlasted the material itself.