Other Legal Proceedings
Admissibility of Grace’s Bankruptcy, Estimations of Asbestos Liability, and Fraudulent Transfer Settlement
by Katy Furlong
The government filed notice with the court in March 2006 that it intended to introduce evidence at trial of Grace’s bankruptcy, its accounting estimations of asbestos liability, and a $1.2 billion fraudulent transfer settlement in which it was involved. Grace did not want any of this evidence to be introduced to the jury, and filed a motion in limine with the court to try to keep the evidence out.
Grace’s Arguments
Grace filed for bankruptcy on April 2, 2001. By 2000, approximately 129,000 asbestos personal injury claims had been filed against Grace. Grace claims that filing for Chapter 11 bankruptcy was its only option because many of the claims against it were baseless, and if it continued to settle baseless claims it would soon run out of money and be unable to pay claims that had merit. Grace believed bankruptcy would put all of its creditors, including asbestos claimants, on equal footing and would allow the court to determine the validity of each claim.
Grace gives the following reasons for why it believes many of the asbestos injury claims against it are invalid: many of the doctors who did the screening of the claimants have taken the 5th Amendment when deposed by Grace; much of the medical evidence regarding asbestos claimants does not meet the appropriate medical standards; and many of the claimants were never exposed to Grace’s products. Grace has filed a plan of reorganization which sets medical criteria that would apply to all asbestos personal injury claims. Any claims meeting Grace’s criteria would purportedly be paid in full by Grace’s asbestos trust.
The legal arguments Grace puts forth revolve around several rules of evidence, including 404b, 403, and 408. Rule 404b is designed to prevent parties from introducing evidence at trial that the accused has committed prior crimes or bad acts for the purpose of showing the accused likely committed the current crime. However, the rule does allow the admittance of prior crimes to prove other things, such as motive, intent, and knowledge. The judge decides whether to admit the prior crime evidence, and considers the following four factors:
• Remoteness in time to the charged offense;
• Whether the other act proves a material issue in the current case;
• Sufficiency of the evidence proving the accused actually committed the prior act; and
• Similarity of the two acts.
Rule 403 provides that evidence should not be admitted if the probative value of the evidence is substantially outweighed by the possibility it will unfairly prejudice or mislead the jury, or waste a significant amount of time. Rule 408 prohibits the introduction of evidence of prior settlements entered into by either party to prove liability.
Grace argues that evidence of its bankruptcy proceedings is inadmissible because the primary issues involved are the estimation of Grace’s personal injury and property damage liabilities that have little to do with Libby. The bankruptcy is irrelevant because less than one percent of the asbestos claims against Grace are from asbestos exposures in Libby. However, if evidence of Grace’s bankruptcy is allowed in, Grace will be forced to defend those massive and complex claims, leading to significant delay in the criminal trial and confusion of the issues.
Regarding Grace’s estimations of potential future asbestos settlements, Grace argues this evidence is inadmissible under rule 408 because it concerns settlement information. As settlement information is not allowed to prove liability, the estimations have no probative value and should be excluded under rule 403. Also, the estimations mostly concerned chrysotile asbestos claims, not tremolite asbestos like the type used in Libby, and because the government’s conspiracy to defraud charge is based on the tremolite asbestos, the estimations are irrelevant.
In 2005, Grace was involved in a fraudulent transfer settlement involving two companies that purchased assets in Grace’s chemical businesses. Grace was not a party to the settlement, but it did receive $1.2 billion that was added to its bankruptcy estate. Grace again argues that the fraudulent transfer settlement had nothing to do with Libby because the main issue was Grace’s solvency, thus it should not be admitted because it does not meet all the elements required under 404b. Also, the evidence would open the door to massive collateral litigation which would swamp the criminal trial and cause significant delay. Like the estimations evidence, Grace believes the fraudulent transfer settlement is inadmissible under rule 408 and does not fit the motive exception in 404b. Finally, Grace argues this evidence is far more prejudicial than probative because it is likely the jury will hear the words “fraudulent” combined $1.2 billion and be prejudiced against Grace.
Government’s Response
The government argues that Grace’s bankruptcy, estimations of potential asbestos liability, and fraudulent transfer settlement are all admissible as proof of Grace’s motive for conspiracy to defraud the government and all of the substantive charges against it. The government contests Grace’s statement of rule 404b regarding the similarity element, and states that the prior act must only be similar to the current charged offense when used to prove knowledge or intent. Here, the government intends to use this evidence to show Grace has a strong financial motive to avoid liability for the Libby asbestos claims.
The government first argues that Grace’s estimations of potential asbestos liability are admissible under 404b because all of the required elements are met: the documents were created just prior to the bankruptcy and thus are not remote in time from the current charged offense; Grace’s own accounting department created the estimates; and the estimates prove a material point in the current charged offense because they show Grace wanted to avoid further liability for asbestos claims. Rule 408 does not apply to these estimations because they are not settlement negotiations, but instead are estimates prepared for the bankruptcy litigation on potential liability for settlements Grace could enter in the future. Finally, the estimations are admissible under rule 403 because accounting documents are not inflammatory or prejudicial. The government plans to use the estimations not to prove Grace’s liability, which is forbidden by the rule, but rather to prove Grace knew of the liability if faced and sought to avoid it.
Regarding Grace’s bankruptcy, the government argues that it is admissible under the 404b motive exception because it shows Grace sought to avoid liability from Libby claimants by concealing and misrepresenting information and impeding the government’s attempts to protect public health and safety. The government reiterates that all of the elements required by 404b are met for the bankruptcy, and the fact that Grace filed for bankruptcy is not prejudicial because it is not a “bad act” like a drug conviction. Grace’s argument that evidence of the bankruptcy is irrelevant because many of the bankruptcy claims arose outside of Libby is misplaced because the bankruptcy is not being used to prove liability in Libby. It is being used to prove Grace’s motive to avoid liability and maximize profits to its shareholders. Finally, the government does not agree that introducing evidence of Grace’s bankruptcy will swamp the criminal trial because they simply are introducing the fact that Grace filed for bankruptcy, not the underlying claims.
The government seeks to introduce evidence of Grace’s $1.2 billion fraudulent transfer settlement from June 2005, which resolved litigation wherein Grace allegedly divested itself of assets that could otherwise have been reached by asbestos personal injury and property damage claimants. Similar to its other arguments, here the government seeks to introduce the settlement to prove motive of the conspiracy and substantive charges. By shielding its assets, Grace was again attempting to avoid liability for asbestos claims and maximize its profits. The government denies that evidence of the settlement will be prejudicial because it seeks only to introduce the settlements, not any evidence of the fraudulent transfers themselves. The settlements state that they are not an admission by any party, hence no relitigation on the underlying claims is necessary at trial. This will prevent the collateral litigation and parade of horrors suggested by the defense.
Order
Judge Molloy deferred ruling on this motion in limine. In his order, he stated:
While the motion is probably well taken, in the absence of context it is inappropriate to rule on it at this time. It is difficult to make the connection of inferences the government seems to draw from documents filed in a bankruptcy proceeding more than a quarter of a century after the conspiracy allegedly began. Nonetheless, context may clarify the purported motive evidence. It is so ordered that the United States advise the court at least one day in advance of offering any such evidence. The evidence involving bankruptcy filings or documentation is not to be referred to specifically in any opening statement.