Case 10-5
Danle Corporation
Danle Corporation (Danle), a public company, conducts business activities primarily
related to the design, development, manufacture, and assembly of passenger cars,
recreational and sport-utility vehicles, minivans, and trucks. Danle used asbestos in the
manufacturing of brake shoes and gaskets because of its heat resistance. During the past
three years, two claims were filed against Danle by automotive mechanics and surviving
family members seeking recovery because of their alleged exposure to asbestos. The
following information summarizes Danle’s exposure to the two asbestos claims over the
past three years. The amount of damages sought in the complaints is considered material
to Danle’s financial statements for each period presented.
Fiscal Year 2008
In November 2008, Danle was served a complaint in the U.S. District Court alleging that
50 mechanics suffered severe illnesses that led to death or disability as a result of
exposure to asbestos from parts manufactured by Danle. The case was brought against
Danle as a class-action lawsuit seeking damages totaling approximately $100 million.
Danle did not believe the asbestos used in the manufacturing of the brake shoes and
gaskets led to the mechanics’ illnesses and immediately retained external legal counsel to
vigorously defend the claim made against Danle in this complaint.
Since this legal matter was in its early stages of discovery and development, Danle
determined that (1) the risk of potential loss at that time was remote and (2) no amount of
potential damages could be reasonably estimated. Therefore, Danle made no disclosure of
the legal matter in its Form 10-K for the year ended December 31, 2008.
Fiscal Year 2009
In October 2009, Danle was served a second complaint alleging that an additional 100
mechanics suffered severe illnesses because of exposure to asbestos from Danle’s
automobile parts. This matter was also filed as a class-action lawsuit seeking damages
from Danle totaling approximately $250 million.
The first class-action lawsuit remained in the discovery phase for this entire fiscal year.
In December 2009, evidence was discovered by Danle’s external counsel relating to the
two lawsuits that led counsel to believe that Danle could potentially, but not probably, be
liable for a percentage of recovery sought by the claimants in those matters. Although
external counsel could not estimate the exact percentage of Danle’s potential exposure, it
believed, on the basis of historical precedence, that the amount of potential loss was less
than 50 percent of the amount claimed.
Historical precedence exists related to two similar asbestos lawsuits litigated within the
past five years with claims made against automotive manufacturers. One of the lawsuits
was settled by a judgment in court in favor of the mechanics and surviving family
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Case 10-5: Danle Corporation
Page 2
members. This lawsuit resulted in the automotive manufacturer remitting payments to the
plaintiffs equal to 70 percent of the amount claimed. The other lawsuit was dismissed in
court with judgment in favor of the automotive manufacturer. In this case, the automotive
manufacturer made no claim payments to the plaintiffs. The plaintiffs appealed the
court’s final decision, but the court denied the plaintiffs’ appeal.
After further assessment of the evidence discovered in Danle’s two lawsuits, management
did not believe that it was probable a loss would occur and could not reasonably estimate
an exact amount of the risk of potential loss as a result of the two lawsuits; therefore, it
determined that no disclosure of the matters was necessary in its Form 10-K for the year
ended December 31, 2009.
First Quarter 2010
No significant developments occurred in the discovery related to the two lawsuits during
the three-month period ended March 31, 2010; however, as a result of additional analysis
and better information, Danle disclosed the following information in the notes to its
consolidated financial statements in Form 10-Q for the quarter ended March 31, 2010.
Note 8 — Litigation
Over the past two years, two class-action lawsuits have been filed against Danle
by automotive mechanics seeking recovery. The lawsuits allege that the
mechanics suffered severe illnesses as a result of exposure to asbestos that was
used by Danle in the manufacturing of brake shoes and gaskets. The lawsuits are
seeking compensatory and punitive damages. Because it does not believe the
asbestos used in the manufacturing of the brake shoes and gaskets led to the
mechanics’ illnesses, Danle has retained external legal counsel to vigorously
defend the claims made against Danle in the lawsuits. Danle estimates the range
of possible loss to be approximately $50 million to $350 million. The recorded
reserve balance for these proceedings and exposures as of March 31, 2010, and
December 31, 2009, was approximately $50 million and $0, respectively. These
reserves represent management’s best estimate of the probable loss, as defined by
ASC 450-20, Contingencies: Loss Contingencies (formerly FASB Statement
No. 5, Accounting for Contingencies).
Second and Third Quarter 2010
No changes in the facts.
Year-End 2010
On the basis of developments in the two lawsuits during the year, Danle disclosed the
following information within the notes to its consolidated financial statements in
Form 10-K for the year ended December 31, 2010.
Note 8 — Litigation
Over the past two years, two class-action lawsuits have been filed against Danle
by automotive mechanics seeking recovery. The lawsuits allege that the
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All Rights Reserved.
Case 10-5: Danle Corporation
Page 3
mechanics suffered severe illnesses as a result of exposure to asbestos that was
used by Danle in the manufacturing of brake shoes and gaskets. Through the
lawsuits, the plaintiffs are seeking compensatory and punitive damages. Because
it does not believe that the asbestos used in the manufacturing of the brake shoes
and gaskets led to the mechanics’ illnesses, Danle has retained external legal
counsel to vigorously defend the claims made against it in the lawsuits. Danle
estimates the range of possible loss to be approximately $200 million to $350
million. The recorded reserve balance for these proceedings and exposures as of
December 31, 2010, and December 31, 2009, was approximately $200 million
and $0, respectively. These reserves represent management’s best estimate of the
probable loss, as defined by ASC 450-20, Contingencies: Loss Contingencies
(formerly FASB Statement No. 5, Accounting for Contingencies).
Required:
Discuss whether you believe that the conclusion reached by Danle to omit
disclosure relating to the class-action litigation was appropriate for the year ended
December 31, 2009.
If Danle’s Form 10-Q for the quarter ended March 31, 2010, were to be reviewed
by the SEC’s Division of Corporation Finance, what comments may Danle expect
to receive regarding its disclosure in that period? Discuss the basis for the
comments you have identified.
If Danle’s Form 10-K for the year ended December 31, 2010, were to be reviewed
by the SEC’s Division of Corporation Finance, what comments may Danle expect
to receive regarding its disclosure in that period? Discuss the basis for the
comments you have identified.
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All Rights Reserved.
