A response to Professor Resnick: Will this vehicle pass inspection?

• Author: Gibson, S. Elizabeth
• Position: Mass Torts Symposium - Response to article by Alan N. Resnick in this issue, p. 2045

INTRODUCTION

Raising the topic of bankruptcy in the midst of a symposium on any nonbankruptcy topic tends to put a damper on things. It is a little bit like trying to sell life insurance at a wedding: Why spoil the fun of discussing intellectual property law, family law, environmental law, or you-name-it by raising the specter of a distressed debtor's resort to that murky realm of the federal courts? Fortunately, the organizers of this Symposium wisely chose to include among the topics for discussion the consideration of bankruptcy as a tool for resolving mass torts. Perhaps its inclusion comes more naturally to this Symposium than to others, since a discussion of mass torts necessarily devotes itself to a crisis situation. Moreover, given the increasing number of companies that have pursued a bankruptcy reorganization solution to their mass tort problems,(1) a symposium focusing on the current realities presented by mass tort litigation and seeking better means of resolving such cases could not reasonably omit consideration of the topic.(2)

Professor Resnick makes a good case for accepting bankruptcy(3) as an appropriate vehicle for resolving what he calls "enterprise-threatening" mass tort liability.(4) Among other things, he points out the procedural and jurisdictional advantages of bankruptcy that permit the consolidation and binding resolution of all pending and future tort claims against the debtor. He then advocates statutory changes to clarify existing uncertainties concerning bankruptcy's treatment of mass tort claims and to bolster bankruptcy courts' authority to achieve a "lasting and global peace" of a corporate debtor's mass tort liability.(5) I am in basic agreement with these two main points of Professor Resnick's article. I agree that bankruptcy is an appropriate tool for resolving mass tort claims asserted against certain defendants and that improvements should be sought to make bankruptcy a more effective mass tort resolution method. I fear, however, that Professor Resnick has overstated the case for bankruptcy in certain respects, and so I address constitutional concerns raised in certain mass tort contexts which a bankruptcy resolution may not be able to ignore.

Even those who have not heretofore embraced the idea that bankruptcy is an appropriate vehicle for resolving mass torts may now be forced to consider such a possibility, given the obstacles that the Supreme Court has recently placed in the way of two other collective resolution devices. The Court's first product liability mass tort decision, Amchem Products, Inc. v. Windsor,(6) rejected a Rule 23(b)(3) class certification that was sought to achieve a global settlement affecting "hundreds of thousands, perhaps millions, of individuals" either currently or possibly in the future possessing asbestos-related claims against one or more of twenty companies.(7) In so ruling, the Court identified certification problems in that case that may exist for many attempted mass tort settlements(8) and for which the necessary solutions are likely to make Rule 23(b)(3) settlements less attractive as a mass tort remedy.(9) More recently, in Ortiz v. Fibreboard Corp.,(10) the Court reversed the certification of a Rule 23(b)(1)(B) class action settlement based on the class's failure to satisfy requirements that the Court derived from a historically based model(11) of limited fund class actions.(12) The Court not only imposed requirements for limited fund class actions that may be difficult to meet,(13) but also pointedly questioned on several occasions, without resolving, whether a mandatory Rule 23(b) (1)(B) class action may ever be appropriately certified in the case of a mass tort.(14) While Amchem and Ortiz may not sound the death knell for mass tort class action settlements,(15) the decisions certainly increase the difficulty of getting either type of class action certified by a district court and ultimately approved on appeal.(16) It is to be expected, therefore, that parties seeking a global resolution of mass tort litigation may look elsewhere for a solution.(17)

Bankruptcy provides such a possible solution--at least until the Supreme Court decides to take and resolve a mass tort case that raises the issue whether bankruptcy may be used as a global resolution vehicle.(18) Companies overwhelmed by the costs of defending and satisfying the claims of thousands of tort claimants have in the past and will continue in the future to seek bankruptcy relief.(19) Accordingly, whether or not bankruptcy is the preferred solution, attention needs to be paid to how it can be made more effective as a resolution vehicle for mass torts, and one that is constitutionally sound in all respects.

1. ADVANTAGES OF BANKRUPTCY FOR RESOLVING MASS TORTS

   Professor Resnick has discussed a number of features of the bankruptcy system that make it an appropriate vehicle for resolving the mass tort litigation facing a bankruptcy debtor. The chief advantage is that bankruptcy, because it demands an all-encompassing financial solution, provides the best conceptual fit for the global resolution of enterprise-threatening mass tort liability. When a company faces massive tort liability that threatens the viability of the company, it is not just a problem for rite tort claimants and the company's management. It is a problem affecting all who have a financial relationship with the company, including other creditors, shareholders, employees, customers, suppliers, officers, and directors. As Professor Resnick correctly points out, bankruptcy is the only resolution mechanism that makes the holders of all of those claims and interests come to the table and thereby come to grips with the problem facing the company. By staying other means of collecting debts and receiving property from the debtor, bankruptcy consolidates all financial claims against the debtor--not just those based on tort law--and then allows the various constituencies to participate in attempting to arrive at an equitable solution for all concerned parties.(20)

   Bankruptcy's all-inclusive approach stands in contrast to the resolution of mass torts by means of limited fund class action settlements.(21) The theory underlying the certification under Rule 23(b) (1) (B) of a mandatory class of tort claimants is that without such consolidation those who are among the first to sue and recover will deplete the company's assets, leaving nothing for those who seek recovery at a later time.(22) Thus, in order to prevent the impairment of the latecomers' interests, all potential tort claimants are brought together in one proceeding, and the limited assets that the defendant company offers are divided equitably among them.(23)

   The problem, however, with this theory is that if the allegedly insufficient fund is the company itself, rather than a finite fund to which only a discrete group has a claim,(24) then the tort claimants are not the only ones competing for the scarce resources. All of the unsecured creditors have a claim to the unencumbered assets--and the shareholders to any remaining balance--and likewise all should be forced, in Professor Resnick's words, to "share the pain."(25) Limited fund class action settlements of mass torts, however, do not operate in this manner. Only the tort claims are compromised; the claims of other unsecured creditors and the interests of shareholders remain unaffected.(26)

   There may well be situations where it is fair to place the burden of compromise only on the tort claimants when a limited fund class action settlement is approved. If the defendant's tort liability is as yet scientifically unproven and still vigorously disputed, it may in fact be the case that the tort claimants are receiving more under the settlement than they would turn out to be entitled to receive if the claims were litigated, even if they are receiving only a percentage of the amount they initially claimed.(27) Thus, it can be argued that the tort claimants are not being treated inequitably in relation to the commercial creditors. Even when liability is well established, a justification for paying commercial creditors in full while the tort claimants are required to share a limited fund may be that full payment of such creditors is necessary for the continued operation of the business, which in turn provides the basis for funding future pay-outs to the tort claimants.(28)

   The advantage bankruptcy has to offer, even when full payment of commercial claims may be in everyone's interest, is that all affected groups have an opportunity to :negotiate and vote on the appropriate treatment of tort claimants, trade creditors, bond holders, shareholders, and the like.(29) Thus the fairness of full payment of commercial creditors is not just assumed or accepted unquestioningly, as it is in the case of limited fund class action settlements. If such treatment is provided for by a bankruptcy reorganization plan, it must either be accepted by all classes of creditors and equity security holders, or substantive protections for non-accepting classes must be satisfied.(30)

   Professor Resnick also points out the procedural advantages that bankruptcy offers for aggregating mass tort claims against the bankruptcy debtor in a single forum and then for arriving at a global and binding resolution of them. Among the features of bankruptcy that he discusses are the automatic stay, the grant of exclusive jurisdiction over the debtor's property, nationwide service of process, and the bankruptcy court's authority to determine where personal injury and wrongful death tort litigation will take place.(31) These features of bankruptcy are essential components of a system designed to achieve a collective resolution of an ailing debtor's financial liabilities; one court is able to bring a halt to individual collection efforts and to oversee the orderly liquidation or reorganization of the debtor for the benefit of all creditors.(32) These same...