Reclaim Democracy!

Asbestos Corporations Use Sham Bankruptcies to Evade Accountability

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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 founded Reclaim Democracy! This article was first published by 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.

Other useful sources:

Wal-Mart Negotiates Its Own Fine for Alleged Child Labor Law Violations

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Company admits no guilt as part of deal

By Donald Mckenzie
Published by The New York Times, February 12, 2005

Editor’s note: Imagine if street criminals received two weeks notice before police began investigating a crime in which they were the primary suspect. And imagine the suspect could plea-bargain away 24 charges against them by paying a fine equal to the amount of money they make in less than 18 seconds — and it was tax-deductible.

That’s the impact of the fine described in this article on Wal-Mart, based on their 2004 annual report which declared $256 billion in revenue last year. The violations in question here are quite minor — especially in comparison to many other offenses by Wal-Mart stores — but if the Bush Department of Labor is seeking to encourage law-breaking , it’s sending the right signal.

Among the bizarre pieces of this story is the Department of Labor recalling a press release in which it referenced one specific harm from the violations — a teenager injured by using a chainsaw — and reissuing a release cleansed of the incident. Why? Wal-Mart was given the right to approve all official public statements on the case!

Update 1: On Feb. 18, 2005, the Labor Department announced it would investigate the propriety of this deal after U.S. Rep. George Miller made the complaints.

Update 2: On Jan. 18, 2006, Rep. George Miller informed us, “I am happy to report that, after much public scrutiny and controversy, DOL notified me today that it has allowed the agreement to expire. Hopefully this shameful episode will stop the Department from making other sweetheart deals in the future.”

Wal-Mart Stores, the nation’s largest retailer, has agreed to pay $135,540 to settle federal charges that it violated child labor laws in Connecticut, Arkansas and New Hampshire.

Labor Department officials said most of the 24 violations covered by the settlement involved workers under age 18 operating dangerous machinery, including cardboard balers and chain saws. In the agreement, Wal-Mart denied any wrongdoing.

Department officials said that one of the violations was in New Hampshire, three were in Arkansas and 20 were in Connecticut, where the investigation began in 2001. One violation involved a youth who injured his thumb while using a chain saw to cut Christmas trees.

The Labor Department and Wal-Mart signed the agreement on Jan. 6, but made no public announcement. The department disclosed the settlement yesterday after a reporter questioned officials about concerns raised by several department employees that the agreement gave Wal-Mart special favors.

The agreement states, “Compliance with the child labor laws and regulations will be an important factor in evaluating the performance of managers.”

A provision also promises to give Wal-Mart 15 days’ notice before the Labor Department investigates any other “wage and hour” accusations, like failure to pay minimum wage or overtime.

That provision drew criticism yesterday from Representative George Miller of California, the senior Democrat on the House Education and Workforce Committee. (Editor’s note: His office subsequently analyzed the agreement and issued this report detailing its irregular nature). It also prompted complaints from some Labor Department investigators who spoke on the condition of anonymity for fear of retaliation.

“With child labor cases involving the use of hazardous machinery, why give 15 days’ notice before we can do an investigation?” asked a district office supervisor who has worked in the wage and hour division for nearly 20 years. “What’s the rationale?”

Victoria Lipnic, assistant labor secretary for employment standards, called the settlement typical, saying that giving Wal-Mart notice before conducting investigations would encourage the company to correct the problems sooner.

The department employees also said the agreement was unusual because the department had never announced it.

Department officials said they were preparing a news release and were waiting for Wal-Mart to pay the $135,540 before making the settlement public.

In the settlement, Wal-Mart agreed not to employ any worker under age 14 and agreed to prohibit any employee under 18 from operating cardboard balers. It also agreed to post a notice on each cardboard baler saying that minors may not use or touch the balers. Wal-Mart also agreed to train new store managers about compliance with child labor laws and to provide more training to current managers on the subject.

“We worked with the Department of Labor to strengthen our training and compliance programs,” said Gus Whitcomb, a spokesman for Wal-Mart, which is based in Bentonville, Ark. “Again, our focus is to be 100 percent compliant with all applicable laws.”

Wal-Mart has faced previous child labor charges. In March 2000, Maine fined the company $205,650 for violations of child labor laws in every one of the 20 stores in the state. In January 2004, a weeklong internal audit of 128 stores found 1,371 instances in which minors apparently worked too late at night, worked during school hours or worked too many hours in a day. Company officials said the audit was faulty and had incorrectly found that some youths had worked on school days when, in fact, those days were holidays.

Under the new agreement, the Labor Department did not waive its right to conduct future investigations. Still, several department officials suggested that the provision for 15 days’ notice might give Wal-Mart an opportunity to hide violations.

John R. Fraser, the government’s top wage official under the first President Bush and President Bill Clinton, said the advance-notice provision was unusually expansive.

“Giving the company 15 days’ notice of any investigation is very unusual,” Mr. Fraser said. “The language appears to go beyond child labor allegations and cover all wage and hour allegations. It appears to put Wal-Mart in a privileged position that to my knowledge no other employer has.”

Ms. Lipnic countered, “We usually call employers before we go to investigate,” and said there was “nothing uncommon or unprecedented about that.”

Several federal employees voiced concern about a Jan. 10 e-mail message sent by the director of the Little Rock, Ark., office for the Labor Department’s wage and hour division after the settlement was reached, that said, “Wage & Hour will not open an investigation of Wal-Mart without first notifying Wal-Mart’s main office and allowing them an opportunity to look at the alleged violations and, if valid, correct the problem.”

But Cynthia Watson, the division’s Southwest regional director, said advance notice would speed compliance. “We are seeking to centralize the points of contact in order to get the people involved to resolve the issue,” Ms. Watson said.

Addendum: Tuesday, Feb. 15, 2005. Victoria Lipnic, assistant labor secretary for employment standards, claims the advance notice applied only to complaints alleging child labor violations and not all wage/time violations.

© 2005 The New York Times