Chapter 15 Mass Torts and Environmental Trusts

• Jurisdiction: United States

Chapter 15 Mass Torts and Environmental Trusts

This chapter provides an introduction to issues related to mass torts and environmental litigation as they intersect with the use of liquidation and litigation trusts.

This chapter provides an introduction to post-bankruptcy trusts established to manage mass torts and environmental litigation. These are often complex areas of litigation involving state and sometimes federal law, and are highly specialized. Formation of trusts to manage such litigation requires the advice and involvement of legal and advisors well versed in these matters. The purpose of this chapter is to provide a broad overview and introduction to mass tort and environmental trusts.

A. Mass Tort Litigation³¹³

Mass tort cases typically involve numerous product-liability and similar tort claims, and are often dispersed over a broad geographic area against one or more defendants. It is typically the vast number of pending cases that overwhelms a particular defendant and results in that defendant filing for bankruptcy in order to obtain the protection of the automatic stay. With the mass tort litigation subject to the automatic stay, the debtor gains the time necessary to develop a plan to manage its mass tort liabilities in the context of a bankruptcy case. A common and proven method of emerging from such a bankruptcy case is through the formation of a post-bankruptcy trust that becomes the sole source of recovery for mass tort claimants, leaving the reorganized debtor to continue its business without the burden of such litigation. It is left to the trust to resolve the mass tort litigation claims and to make distributions to those claimants.

Bankruptcy cases involving mass tort or environmental liabilities require balancing the debtor's interests against the interests of the tort claimants, the debtors' insurers and the debtor's general creditors. The debtor seeks to maintain control, continue its business, preserve management, contain and manage its mass tort liability, and, if possible, preserve equity. Tort claimants seek to obtain as much recovery as possible from the debtor and insurers, and seek to control and minimize the burden of claims-resolution procedures. The debtor's insurers are focused on enforcing the terms of their policies and policy limits, minimizing fees and expenses, settling by negotiated compromise, and obtaining protection from future claims and collateral attacks. The debtors' general creditors are acting to preserve their own recoveries and ensure that such recoveries are not dwarfed by the amount of mass tort or environmental claims.

B. Use of Litigation Trusts

Chapter 11 may provide an effective and hopefully efficient means to resolve a company's otherwise-overwhelming mass tort liabilities. Although applied most often to asbestos liabilities, chapter 11 has also been used to resolve liabilities for mass torts associated with silica dust, medical device failures, defective automobile parts or systems, contaminated food products, and such catastrophic events as an explosion, terrorist attack or oil spill. We provide some specific examples below. In chapter 11, the debtor uses the bankruptcy court to estimate or establish the number of claimants and the amount of its mass tort liabilities. The claims can then be paid or compromised in the context of a bankruptcy plan.

C. Asbestos Bankruptcy Trusts

To date, approximately 100 companies have filed for bankruptcy to, at least in part, manage their asbestos personal-injury liabilities.³¹⁴ As demonstrated in the chart below, the estimated 2012 year-end funding of trust assets for cases with confirmed plans totaled approximately $19 billion. In addition, another $13 billion of estimated proposed funding was being contemplated for trusts associated with pending plans that were subject to bankruptcy conirmation.

The vehicle used to manage such liabilities is a litigation trust, first established in the Johns-Manville Corp. and UNR Industries Inc.³¹⁵ bankruptcy cases, through which existing and future asbestos personal-injury claims against the debtor are "channeled" to a trust that is funded and authorized to resolve such claims. Claimants are then enjoined from litigating such claims against the now-reorganized debtor. In 1994, the Bankruptcy Code was amended to include a new section, § 524(g), that codiied the procedures irst used in the Johns-Manville and UNR Industries bankruptcy cases.³¹⁶

Among the many issues addressed in the Manville case was how to deal with future asbestos claimants: individuals who were exposed to Manville's asbestos products prior to the bankruptcy petition date, but who, because of the long latency period inherent in asbestos-related diseases, had yet to manifest any symptoms of disease. The Manville court appointed a future claimants' representative to represent the interests of these claimants.³¹⁷ A plan of reorganization was ultimately confirmed that relied upon § 105(a) of the Bankruptcy Code to empower the court to establish a post-confirmation trust to satisfy the claims of all persons, present and future, with asbestos-related personal injury claims against Manville. Section 105(a) authorizes the court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." The court, per the plan, issued an injunction channeling all asbestos personal-injury claims, present and future, to the trust and provided that the claimants could seek recoveries solely from the trust assets, and not from the reorganized Manville.

In 1994, Congress passed a number of amendments to the Bankruptcy Code, including a new § 524(g). Section 524(g) "is modeled on the trust-injunction in the Johns-Manville case...."³¹⁸ Accordingly, § 524(g) sets forth the requirements for establishing the trust to satisfy asbestos personal-injury claims and the injunction to protect the reorganized debtor. In pertinent part, the trust must "be funded in whole or in part by the securities of one or more debtors involved in such plan and by the obligation of such debtor or debtors to make future payments, including dividends," and "is to own, or by the exercise of rights granted under such plan would be entitled to own if specified contingencies occur, a majority of the voting shares of" the debtor, the debtor's parent, or a debtor-subsidiary of the debtor, and use its assets or income to pay present and future claims.³¹⁹

The bankruptcy court must make a number of determinations, designed to protect future claimants, before it can confirm a § 524(g) plan and issue the channeling injunction. The statute defines such future claims as "demands," recognizing that such persons do not have "claims" existing at the time of the bankruptcy case.³²⁰ These determinations include:

1. The debtor is likely to face "substantial future demands" for payment for similar asbestos-related actions, and the amount, number, and timing of those demands are indeterminate;
2. The "pursuit of such demands outside the procedures prescribed by such plan is likely to threaten the plan's purpose to deal equitably with claims and future demands";
3. A supermajority (at least 75 percent) of the asbestos claimants' class has voted in favor of the plan; and
4. The trust will implement a review process that will provide "reasonable assurance" that the trust will be able to pay present and future claimants in "substantially the same manner."³²¹

The validity of the injunction is also contingent upon the court appointing a representative for the future demand-holders and the court determining that the injunction is fair and equitable with respect to those future claimants.³²² Assuming these requirements are met, the channeling injunction shields not only the debtor, but also nondebt-or parties specifically identified in the injunction or otherwise part of an identifiable group named in the injunction, specifically including parties with a financial interest in the debtor, its predecessor, or its past or present affiliates; managers and executives of the debtor or "related party" (as defined in the section); insurers of the debtor or related party; and parties involved in a change of the corporate structure or financial condition of the debtor or related party.³²³

Many debtors have utilized these procedures to create a § 524(g) trust, including W.R. Grace, Owens Corning, Congoleum, Armstrong World Industries and U.S. Gypsum. Since 1988, more than 60 trusts have been established, with about $37 billion in total assets.³²⁴ The amount of money necessary to fund the trust is typically one of the most contested issues in the bankruptcy case, with the debtors arguing that the liabilities should be valued at a low amount, while the asbestos claimants argue for a high amount. Absent settlement, the value of any...