Asbestos Law - Article 5
Proposed Federal Asbestos Legislation Gains Surprise Momentum
by Michael A. Rosenthal
Aaron G. York
Gibson, Dunn & Crutcher LLP
Dallas Office - April 18, 2005
For several years, the Senate Judiciary Committee has struggled with a bill to create a privately-funded national asbestos compensation fund. After many false-starts, many observers came to believe that the bill had little chance of becoming law. But in a surprise development, it appears that the bill has now been modified so as to garner substantial bipartisan support. In fact, some reports indicate that the bill could come out of committee as early as next week, pass both houses of Congress, be signed by the President and enacted into law very quickly.
If it becomes law, the proposed Fairness in Asbestos Injury Resolution Act of 2005 (the "FAIR Act") will have far-reaching consequences. The FAIR Act would create a privately-funded national asbestos compensation fund (the "Fund"), with ongoing funding requirements for asbestos defendants and insurers. As a result, such entities will face significant compliance issues. In addition, the increased prospects for the FAIR Act's passage should shape the strategies utilized by asbestos defendants and insurers in litigation, and transactions involving such defendants should take the FAIR Act's provisions into account, during the interim period before enactment.
The latest version of the FAIR Act that has garnered bipartisan support has only very recently been released to the public. If the FAIR Act does come out of the Senate Judiciary Committee, Gibson Dunn will schedule a complimentary webcast briefing with respect to compliance and planning issues raised by the bill. In the meantime, basic compliance and planning issues created by the currently-available version of the FAIR Act are described below as a means of highlighting issues that our clients and friends may need to consider in the near future.
FAIR Act Compliance Issues
The FAIR Act will create significant compliance issues for entities subject to its provisions. Indeed, the FAIR Act would create a new administrative body called the Office of Asbestos Disease Compensation that will issue a new set of federal regulations to be promulgated by the office's Administrator. Examples of the more significant compliance issues include:
Liability to the Fund. Asbestos defendants or indemnitors will be liable to make payments to the Fund based on their assignment to various tiers and subtiers under the FAIR Act. The FAIR Act assigns funding participants to tiers based on their prior asbestos expenditures, and assigns them to subtiers based on revenues. Based on their assigned tier and subtier, a non-debtor asbestos defendant or indemnitor could be required to pay the Fund, on an annual basis, anywhere from $100,000 to $27,500,000. Annual payments will continue for thirty years. Defendants that have been subject to asbestos claims under the Employers' Liability Act (45 U.S.C. § 51 et seq.) are required to make additional payments. In addition, the FAIR Act would permit the Administrator to impose a pro rata surcharge on each funding participant in situations where certain Fund balances fall below stated minimums. The total payments required of all defendant participants over the life of the Fund shall not exceed $90,000,000,000, less credits from asbestos bankruptcy trusts.
An Asbestos Insurers Commission will be established to determine the amount that each insurer with asbestos-related obligations that have exceeded $1,000,000 shall be required to pay the Fund. The total payment required of all insurers over the life of the Fund shall equal $46,025,000,000.
Reporting. Within 120 days of enactment, defendant participants must file with the Administrator: (1) a statement of whether the participant elects to report on a consolidated basis; (2) a good-faith estimate of prior asbestos expenditures; (3) a statement of 2002 revenues; (4) payment in the amount specified for the lowest subtier within which the participant falls. Asbestos debtors are required to file certain reports with the Administrator within 60 days after enactment. Defendants who consent to be assigned to the highest tier are exempt from providing information concerning prior asbestos expenditures, and defendants who consent to be assigned to the highest subtier are exempt from providing revenue information. The Administrator will evaluate the information submitted and send a notice of initial determination identifying the tier and subtier to which the defendant participant is assigned and stating the participant's annual payment obligation. Within 30 days of receiving the notice, the defendant participant shall pay any balance required. Insurer participants also have reporting requirements.
Adjustments. Defendant and insurer participants may seek adjustment of the amount of its payment obligations, under procedures to be established by the Administrator, based on severe financial hardship or demonstrated inequity.
Offsets. Certain insurers and third parties that make payments to an asbestos bankruptcy trust can receive dollar-for-dollar reduction in the amount payable to the Fund.
Review. A defendant participant must obtain rehearing of the Administrator's determination of the applicable tier/subtier or of a financial hardship or inequity adjustment within 30 days of receipt of the Administrator's determination. Actions to review determinations subject to rehearing by the Administrator must be commenced within 30 days after a decision on rehearing. Petitions to review other determinations must be filed not later than 60 days after a final determination is issued. The United States Court of Appeals for the District of Columbia Circuit shall have exclusive jurisdiction over any action to review a final determination by the Administrator or the Asbestos Insurers Commission regarding liability of any person to make a payment to the Fund.
Stepdowns and Funding Holidays. The FAIR Act allows certain pro rata reductions in the funding obligations at the end of the tenth, fifteenth, twentieth and twenty-fifth years after the date of enactment. The Administrator may reduce such stepdowns if necessary to ensure that the Fund's assets are sufficient to pay anticipated liabilities. In addition, starting ten years after enactment, the Administrator may reduce or waive all or any part of the payments required in a particular year if the assets of the Fund are sufficient to satisfy anticipated obligations.
Default. If any participant fails to make any required payment to the Fund, after demand and a 30-day opportunity to cure, there shall be a lien in favor of the United States for the amount of the delinquency (plus interest) upon all property, and rights to property, belonging to such participant. If the failure to pay was willful, the Administrator may seek punitive damages and costs of collection, plus a fine equal to the total amount of the liability that has not been collected.
Criminal Penalties. The FAIR Act imposes criminal penalties in connection with efforts to defraud the offices established by the FAIR Act. The FAIR Act also imposes new criminal penalties for willful violations of OSHA standards involving asbestos. In addition, such violators would be required to contribute to the Fund.
FAIR Act Litigation/Transaction Planning Issues
The FAIR Act also contains provisions that will impact asbestos litigation and transaction strategy. Examples include:
Pending Asbestos Litigation. Because the Fund is to constitute an exclusive remedy for asbestos claimants, any asbestos claim that is not already in trial as of enactment shall be stayed. But FAIR Act would allow claimants with the most serious conditions to pursue their claims in the tort system if the Administrator cannot certify to Congress that the Fund is operational within nine months of enactment. Claimants with less serious conditions will be eligible to continue to pursue their claims in the tort system if the Administrator cannot certify that the Fund is operational within twenty-four months of enactment. All unresolved asbestos claims return to the tort system if the Fund terminates early based on financial shortfall.
Asbestos Settlement Agreements Superseded. Unless certain specified criteria are met, the FAIR Act shall supersede agreements with respect to the treatment of asbestos claims and such agreements shall have no further effect.
Effect of Prior Payments Under Asbestos Settlement Agreements. The FAIR Act does not offer any credit or offset to a participant's liability to the Fund for prior payments with respect to asbestos settlements or judgments.
Sale of Assets Does Not Affect Tier Assignment. After a defendant participant is assigned to a tier and subtier, the participant remains in that tier and subtier throughout the life of the Fund, regardless of subsequent events, including the sale or transfer of assets.
Bankruptcy: Payments to the Fund shall constitute administrative expenses in bankruptcy, shall not be stayed, shall not be discharged or impaired and shall be paid in accordance with the FAIR Act.
