Asbestos and Sham Bankruptcies

By Jeff Milchen and Stuart Levit
First Published in The American Prospect, April 6, 2005

It’s hard for many Montanans not to feel outrage when we hear President Bush speak of “frivolous asbestos lawsuits” causing business bankruptcies. We know how the WR Grace & Co. used accounting trickery to “go bankrupt,” and thereby avoid fully compensating more than 1,000 Lincoln County residents who had been exposed to deadly asbestos dust.

But WR Grace is not an isolated example. Many of the several dozen business bankruptcies — touted as the tragic results of “runaway lawsuits” — are examples of corporate planning to shield assets from victims rather than a function of being “broke” in any traditional sense.

For example, WR Grace CEO Paul J. Norris made $5 million last year. Not bad for a company in the midst of Chapter 11 bankruptcy reorganization. Many other top executives in “bankrupt” asbestos corporations have seen lucrative bonuses or salary increases.

To be sure, people who have not been hurt have taken advantage of some companies with no culpability for asbestos deaths (typically small businesses that simply resold products containing asbestos). Relatively few of the 6,000 businesses that have defended or settled asbestos claims should bear responsibility for criminal actions and victim compensation, and it would be unjust to ignore that many small-business owners have also become victims of corporations like WR Grace.

Such economic harm, however, pales when compared with the events at WR Grace’s Libby, Montana, mine, where it knowingly exposed thousands of workers and area residents to tremolite, a particularly lethal form of asbestos, while managers lied to employees, residents, and government health officers and regulators about the danger.

The main product of the Libby plant was vermiculite, a mineral valuable for insulation, potting soil, vehicle’s brake pads, and other products. The vermiculite in Libby, however was naturally intermingled with the deadly asbestos.

Asbestos was once widely used for insulation and other applications because of its light, fine, fire-resistant fibers. But when inhaled, those fibers can lodge permanently in lungs, causing scarring of the lung lining. This process gradually chokes off breathing and often causes lung cancer.

In 1994, Congress passed a law permitting bankruptcy protection for companies with asbestos liability. This effectively made bankruptcy the most sensible response for many corporations facing asbestos claims.

But the Bush administration seems intent on recasting the perpetrators as victims by focusing attention on the costs of asbestos litigation to corporations.

Already, the U.S. Senate passed a bill to divert many of the largest class-action lawsuits from state courts into the federal court system. Though not inherently bad, the law also limits the kinds of claims that can be made, which effectively denies some victims the chance to be heard at all — a radical change from current and historic law. The Bush administration has pushed for absurdly low limits on noneconomic damages in civil lawsuits that would be incapable of deterring illegal or negligent actions by multibillion-dollar corporations like WR Grace.

Further, capping asbestos liability is irresponsible because the scope of damages is not yet known. Despite being banned in most industrialized nations, asbestos-bearing products, including many vehicle brakes, still are imported to the United States.

WR Grace executives knew tremolite caused lung disease and cancer from the day Grace acquired the Zonolite Company and its Libby mine in 1963. We know this because Zonolite memos dating from the mid-1950s discussed the dangers of exposing workers to asbestos.

Internal documents — many unearthed only as a result of civil lawsuits — revealed unmistakably that WR Grace executives knew and discussed harm to their workers and the community, but concealed the deadly problem from them and from government officials A company letter to its insurer in 1967 reported that WR Grace “did indeed have a severe problem,” with workers’ health and “might expect a good many claims involving asbestos.”

A subsequent memo from 1976 noted, “Our major [worker health] problem is death from respiratory cancer. This is no surprise.”

Yet WR Grace denied employees adequate respirators, protective clothes, or a reasonable opportunity to clean themselves at the mine and processing plant. Plant managers even gave away contaminated materials for public use, including mine tailings to build a local school’s running track. Grace managers also knew that, at one point, up to 5,000 pounds of asbestos was being released from the plant into Lincoln County’s air every day.

Nearly 200 Libby residents [as of spring 2005], most of whom never worked at the mine, have died from asbestos-caused lung disease. An estimated 1,200 more in Lincoln County are sick with asbestos-related lung disease.

While WR Grace delayed taking any action to protect workers, once they began dying, it wasted little time protecting shareholder assets from the inevitable lawsuits. Between 1988 and 1998, WR Grace executives “eliminated” more than three-quarters of the company’s $6 billion in assets by redistributing them to legally separate entities with no liability to compensate victims or creditors. WR Grace filed for bankruptcy in 2001, after most of its former assets had been removed.

Among other companies using bankruptcy as a shield is Halliburton, which faces $4.3 billion in pending asbestos claims through its KBR subsidiary. In March 2005, its Web site boasted “Chapter 11 is very good for our investors.” According to Halliburton, nobody goes out of business, business operations don’t change, and bankruptcy allows to it to “cleanse the company” of its asbestos liabilities and keep the company strong.

Senate Majority Leader Bill Frist is among those who blame asbestos litigation for “forcing” Owens Corning into bankruptcy in 2000, and subsequent layoffs at its Granville, Ohio, facility were touted as evidence of litigation’s pernicious effects. However, many jobs terminated were in Owens Corning’s litigation department, not manufacturing or industry. Oh, yes, CEO David T. Brown took home $3.8 million in 2004.

While the congressional majority has erected formidable barriers to prevent individuals from escaping debts via bankruptcy, some proposed asbestos reforms would make it easier and cheaper for corporations to do the same.

Because of the latency period for asbestosis (anywhere from seven to 30 years), many researchers believe that fatalities in the United States won’t peak for another decade. The greatest potential harm from asbestos reform is that those individuals exposed to asbestos who have not yet, but almost surely will, develop asbestosis or cancer will be denied medical care and compensation.

To achieve just asbestos litigation reform that will compensate victims without generating unnecessary business and legal costs requires us to first understand the damage and corporate culpability. So far, we are largely in the dark.

Stuart Levit is an attorney and a former mine-reclamation specialist for the state of Montana. Milchen directs ReclaimDemocracy.org. This article was first written for The American Prospect.

© 2005 ReclaimDemocracy.org

Updates:

  • June, 2005: the state of New Jersey sued Grace and two of its executives for allegedly lying about asbestos contamination at its Hamilton, NJ vermiculite processing facility. The complaint is here (26 pp pdf from scan).
  • Sept, 2005: WR Grace attorneys have petitioned U.S. District Judge Donald W. Molloy to move the trial of the corporation on conspiracy, Clean Air Act violations, and other criminal charges –scheduled to begin Sept 11, 2006 — out of Montana. The petition claims jurors likely will be predisposed to find WR Grace guilty after years of press coverage about the corporation’s actions in Libby. Full story here.
  • Jan. 2014: For some years now, unscrupulous plaintiffs and lawyers have victimized many companies that had little or no culpability in distributing products containing asbestos, as this BusinessWeek article explains.

Other useful sources: