Creditors' Committees: Giving Tort Claimants a Voice in Chapter 11 Bankruptcy Cases

• Publication year: 2015

Creditors' Committees: Giving Tort Claimants a Voice in Chapter 11 Bankruptcy Cases

Corinne McCarthy

CREDITORS' COMMITTEES: GIVING TORT CLAIMANTS A VOICE IN CHAPTER 11 BANKRUPTCY CASES

Abstract

Over the years, tort claimants have increasingly appeared in the bankruptcies of corporate debtors. More so than other participants in bankruptcy proceedings, tort claimants are brought into this forum involuntarily. Unlike shareholders, lenders, or even the corporate debtor's employees, tort claimants often do not choose to engage in commercial transactions with corporate debtors. Rather, their claims arise because the debtor has harmed them without their consent. To protect their interests, tort claimants often request that courts order the United States Trustee to appoint a creditors' committee to represent them. Courts have been authorized to do so under 11 U.S.C. § 1102(a)(2). While courts have the authority to form creditors' committees for tort claimants, courts do not uniformly grant tort claimants' requests.

Through the lens of the Montreal, Maine and Atlantic Railway, Ltd. bankruptcy case, this Comment argues that courts should form creditors' committees for tort claimants when corporate debtors with tort liability file for bankruptcy. Four arguments support this proposition. First, there are strong policy reasons for forming creditors' committees for tort claimants. Second, courts need to form creditors' committees for tort claimants to ensure that tort claimants are guaranteed due process of the law. Third, forming creditors' committees for tort claimants is consistent with the case law interpreting 11 U.S.C. § 1102(a)(2), the Bankruptcy Code section authorizing the formation of creditors' committees. Finally, forming creditors' committees for tort claimants can have practical significance.

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Introduction

This Comment argues that courts should form a creditors' committee of tort claimants when a corporation with tort liability files for relief under chapter 11 of the Bankruptcy Code (the "Code").¹ The Code currently authorizes courts to form one or more creditors' committees to represent unsecured creditors.² The Code gives these committees significant powers, including the ability to negotiate a plan of reorganization with the debtor³ and the ability to hire lawyers, accountants, and other professionals to represent the committee's interests.⁴

Although forming a creditors' committee of tort victims is currently not commonplace, such committees need to be the norm, not the exception, in chapter 11 bankruptcy cases. The reasons why tort claimants need their own creditors' committee can be shown through the use of the following hypothetical. Imagine losing a relative or suffering a serious injury at the hands of a corporate tortfeasor. You desire compensation for your loss, but the corporation that has harmed you has filed for bankruptcy. To make matters worse, you find out that the corporation owes significant amounts of money to several other parties. These parties include sophisticated individuals and various companies that have voluntarily engaged in business with the corporate debtor, including the corporation's employees, lending institutions, and suppliers. Some of these parties have secured claims so they will get paid in full before you are paid, even if the debtor cannot pay you after it has satisfied these debts. Others have positions on the unsecured creditors' committee, which will be able to hire professionals on the debtor's dime. Such professionals have the expertise and know-how to negotiate for better repayment options and other advantageous treatment on behalf of their clients. You have requested that the court appoint a creditors' committee to represent you. However, there is the chance that the court may instead give you only a seat on the existing creditors' committee, or may deny your request outright. This possibility is a problem because the existing committee is stacked with

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individuals whose interests and even possible avenues for repayment are completely dissimilar from your own interests.

This hypothetical reflects the real-life plight of tort claimants in the Montreal, Maine and Atlantic Railway, Ltd. ("MMA") bankruptcy case. On July 6, 2013, a train owned by MMA broke free from a rail yard in Nantes, Quebec.⁵ At the time, the unmanned train was carrying about seventy-three tank cars filled with crude oil.⁶ Soon after breaking free, the train derailed and plowed into buildings in the nearby town of Lac-Megantic, Quebec.⁷ The ensuing fires burned for thirty-six hours and wreaked havoc in the town center, causing an estimated forty-seven deaths, countless other injuries, and leveling forty buildings.⁸ Given the extent of the devastation experienced by accident victims, news commentators have labeled the train crash the worst in North America in twenty years.⁹

One month after the crash, MMA filed a voluntary petition for relief under chapter 11 of the Code in the United States Bankruptcy Court for the District of Maine.¹⁰ Later the same month, the estates of some of the people killed in the train crash filed a motion to appoint a committee of creditors to represent the interests of the wrongful death and personal injury claimants.¹¹ A few days later, the Quebec government, the town of Lac-Megantic, and the tort-victim's class-action representatives filed a similar motion with the bankruptcy court.¹² The Chapter 11 Trustee¹³ opposed both of these motions.¹⁴ In his opinion,

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appointing a creditors' committee in the case would be wholly unnecessary.¹⁵ However, the experience of tort claimants in other chapter 11 bankruptcy cases strongly contradicts the Chapter 11 Trustee's skepticism.

Tort claimants have faced harsh outcomes in chapter 11 bankruptcy cases when they do not have their own creditors' committee. In In re Chrysler, LLC, more than 150 personal injury victims requested the bankruptcy court to appoint an official creditors' committee of tort claimants.¹⁶ Instead of appointing a separate committee to represent the personal injury victims, the United States Trustee¹⁷ appointed one tort claimant and one asbestos claimant to an existing creditors' committee.¹⁸ This creditors' committee consisted primarily of parties who were interested in selling Chrysler's property "free and clear" of tort liability.¹⁹ These creditors had negotiated a deal in which they would receive an ownership interest in the newly formed Chrysler entity.²⁰ Eventually, these creditors prevailed over the tort claimants because Chrysler's assets were sold free and clear of the existing tort claims against Chrysler.²¹ Chrysler provided virtually nothing to tort claimants who had

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prepetition claims against it.²² Similarly, in In re General Motors, Inc., when the court did not form a creditors' committee to represent tort claimants, General Motors' assets were sold free and clear of more than 300 tort claims.²³

In light of these problems, this Comment examines how and why creditors' committees should be formed for tort claimants in chapter 11 bankruptcies. This Comment proceeds in five parts. Part I provides an overview of creditors' committees for the purpose of showing that these committees have certain rights and powers which can be used to protect tort claimants' interests. Part II.A argues that forming creditors' committees for tort claimants is supported by public policy. Part II.B shows that such creditors' committees are needed to guarantee tort claimants due process of the law. Part II.C demonstrates that forming committees of tort claimants is consistent with the case law addressing the statutory requirements for creditors' committees. Finally, Part II.D contends that forming creditors' committees for tort claimants is likely to have important practical significance. Thus, this Comment will show that courts should uniformly form creditors' committees for tort claimants when a corporation with tort liability files for bankruptcy.

I. Introduction to Creditors' Committees

This part of the Comment will describe why forming a creditors' committee will protect tort claimants' interests and how such committees can be formed.

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A. Advantages Afforded Debtors in Chapter 11 Bankruptcies

Chapter 11 provides debtors significant powers, which can be used at the expense of a debtor's creditors.²⁴ Most importantly, the chapter 11 process allows the debtor to modify its obligations to creditors while allowing the debtor to continue operating its business or to sell its assets as a going concern.²⁵ In a traditional chapter 11 bankruptcy, a debtor specifies how it plans to repay its debts by drafting a plan of reorganization.²⁶ This plan is supposed to be drafted based on input from a debtor's creditors.²⁷ A debtor should take into account creditors' input because a debtor's reorganization plan is similar to a contract between a debtor and its creditors—the debtor's obligations to pay its creditors are extinguished in exchange for what the creditors receive under the plan.²⁸

More recently, many corporate debtors have opted not to draft a reorganization plan. Instead, they use the chapter 11 process to marshal their assets in anticipation of selling all or a portion of the business as a going concern in a § 363 sale.²⁹ This process is known as a § 363 sale because § 363 of the Code gives a debtor the authority to sell assets outside the normal course of business and without a reorganization plan.

Section 363 sales can impact tort claimants' interests. The issue is that 11 U.S.C. § 363(f) gives debtors the ability to sell their property to a buyer free and clear of "any interest in such property" under certain circumstances.³⁰ While the Code does not define the phrase "any interest in such property," courts have interpreted this term broadly to include tort claims.³¹ When a

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purchaser acquires the debtor's property free and clear of tort claims or any other...