Much like the housing bubble, the days of huge class action settlements providing millions in attorney fees may be ready to burst, at least in one federal circuit.
The Philadelphia-based 3rd U.S. Circuit Court of Appeals is starting to take a hard look at settlements that provide for huge attorney fees while leaving insurance companies stuck with the bill—and sometimes leaving plaintiffs claiming they got less than their fair share.
For years, critics say, it worked like this: Plaintiffs lawyers would file mass tort class actions—such as those for asbestos, tobacco and other products found to cause grave harm. Then, when the company allegedly responsible for damages filed for bankruptcy protection in the face of the claims, plaintiffs lawyers would settle for an amount that provided millions of dollars in attorney fees, while leaving individual claimants with a relatively small recovery. The company was then absolved of further liability and could reorganize and emerge relatively unscathed.
A STRATEGY DRAWING SCRUTINY
But recently that structure has begun to show cracks. In some instances, insurance companies—which usually pay the bulk of these settlements—have cried foul. The companies are seeking to intervene in cases where they face huge liabilities, sometimes joining forces with unhappy claimants who feel their lawyers didn’t have their best interests at heart when they agreed to the settlements.
In one case, the 3rd Circuit revived a suit last October that had been filed by a group of asbestos workers alleging their former lead attorneys had breached their fiduciary duty in negotiating a settlement. Huber v. Taylor, 469 F.3d 67.
The settlement had left some claimants eligible for recoveries 2.5 to 18 times higher than for the Huber plaintiffs, said the opinion by Circuit Judge Jane R. Roth.
The Huber plaintiffs, former steelworkers from Pennsylvania, Ohio and Indiana, say they were never fully informed of fee arrangements between their local lawyers and lead counsel in Texas and Mississippi. They say the deal gave the lead lawyers incentive to apportion more of the settlement to claimants in their own states because they would not have to share fees in those cases.
The lead attorneys had argued that they owed no fiduciary duty to claimants in states where they were not licensed. The court called that argument “preposterous” and found that lead counsel owed a duty to all claimants.
New York City lawyer Irving Cohen represents the aggrieved claimants from the Northern states who won the right to sue their former lead counsel.
He lost a bid to gain class action status for claimants seeking return of a portion of the $160 million in attorney fees, but Cohen says he is appealing the ruling.
“Courts are now looking at what could be called an abuse of the system by lawyers,” Cohen says. “I think other federal circuits will certainly follow the same line of thinking.”
Barry Ostrager, a litigation partner with New York City’s Simpson Thacher & Bartlett, agrees that the 3rd Circuit’s scrutiny of settlements in mass tort cases bodes significant change.
Ostrager often represents insurance companies that are forced to pay for settlements negotiated by their insured defendant companies. In another 3rd Circuit case, Ostrager won the right for his client insurance companies to intervene in the settlement of claims against Mercerville, N.J.-based Congoleum Corp., which was also being pursued by asbestos claimants. In re Congoleum Corp., 426 F.3d 675 (2005).
The court in Congoleum ruled that Ostrager’s clients had standing to contest the appointment of a “special insurance counsel” to negotiate with claimants’ counsel in Congoleum’s Chapter 11 bankruptcy reorganization.
The court said that because the hiring of the special insurance counsel was a pretrial issue that went to the fundamental due process of the ongoing proceedings, the insurers could intervene to argue against it.
The Congoleum court said the proposed special insurance counsel had ongoing co-counsel relationships with the claimants’ counsel in other asbestos cases. That, said the court, constituted a conflict of interest. As a result, the court barred the special insurance counsel from the case, saying claimants’ counsel did not disclose the conflict and seek effective waivers from the claimants—in violation of the rules of professional conduct.
The ruling was a rare victory for an insurer in these kinds of cases in which companies declare bankruptcy and enter into “prepackaged” proceedings.
They hope to streamline the process by getting rid of debt and emerging as quickly as they can. Federal bankruptcy rules limit who can intervene as a party.
Ostrager says conflicts like the one in Congoleum are increasingly common, particularly in mass tort litigation tied to a particular source of injury, such as asbestos.
“There’s a small group of firms that claim to represent classes of plaintiffs—some of whom are repeat plaintiffs from one jurisdiction or defendant to another—that have caused courts to become cynical as to whether these cases are really being brought on behalf of individual clients or are lawyer-generated,” Ostrager says.
A DIFFERENT TAKE
But Joseph F. Rice, one of the plaintiffs counsel in Congoleum, says that what the insurers really didn’t like about the deal he helped negotiate was the agreement to set aside $1 million in escrow for attorney fees, not the impact on claimants or the fairness of the overall settlement.
“There’s no place at the table for insurance companies who want to save their own money at the expense of their insureds,” says Rice of Motley Rice in Mount Pleasant, S.C.
Rice says insurance companies have simply found another way to avoid paying claims they are legally obligated to pay. Courts are wrong to allow insurers to intervene in bankruptcy proceedings, he says, because the result is often a failure of the reorganization plan, and thus of the company.
“The insurance companies have been successful in preventing Congoleum from reorganizing and saving this little mom-and-pop company. [Congoleum] will probably now go into liquidation, and then no debtor gets the full amount of their claim,” says Rice.
Rice says that in the wake of decisions such as Congoleum, he and other plaintiffs counsel have begun to add an “insurance neutrality” clause to settlements in an effort to block insurers from having standing. That clause stipulates that the defendant company will offer for settlement all of the insurance proceeds to which it is entitled. That way, says Rice, insurers can’t contest the settlement amount.
Ultimately, the insurers’ only recourse is conventional insurance coverage litigation with the defendant companies to determine the exact amount of coverage. The company will then turn over that amount to the claimants’ settlement trust, Rice says.
ANOTHER CLOSE LOOK
In another 3rd Circuit asbestos case, the lower courts had adopted neutrality provisions preserving the legal rights of insurers for the debtor, Combustion Engineering, a boiler manufacturer. The appeals court allowed the insurers to intervene, but cited the clause in finding they lacked standing to challenge confirmation of the plan. However, the court permitted certain cancer claimants to challenge the settlement on the grounds that it favored current over future claimants and did not treat the most seriously injured plaintiffs fairly. In re Combustion Engineering, 391 F.3d 190 (2004).
Ostrager and Cohen say asbestos cases are just the tip of the iceberg in terms of courts taking a closer look at settlement agreements in mass tort cases. Ostrager says some courts seem to be interested in potential conflicts among co-counsel in mass securities fraud cases as well.
“Courts are becoming more experienced and sensitized to these issues in these cases,” he says. “Eventually, I do think the Supreme Court will have to speak to these issues.”