Bankruptcy as a vehicle for resolving enterprise-threatening mass tort liability.

• Author: Resnick, Alan N.
• Position: Mass Torts Symposium

INTRODUCTION

A difficult challenge facing the American judicial system is providing for the fair and efficient resolution of litigation arising from mass tort liability. A mass tort involves a harmful act or series of acts by a company, such as the production of a defective product, that results in injuries to numerous victims--sometimes numbering into the thousands or hundreds of thousands. The most difficult cases are those involving "long-tail" mass tons, such as those relating to :asbestos, where there is a long latency period between a person's use or exposure to a harmful product and the first manifestation of harm. Removal of the defective product from the marketplace or from society as a whole will not end the continuing manifestation of injuries. Given the thousands of future: claimants who will first discover their injuries in decades to come, long-tail mass torts place an enormous burden on the defendant company and the judiciary. The high costs of litigation threaten both adequate compensation for the vast number of victims and the survival of the defendant's business.

The practical inability to provide each tort victim with traditional, individualized adjudication under the usual rules of litigation in these mass tort situations has led to the use of class actions or other mechanisms designed to deal collectively, rather than individually, with numerous claimants. When a defendant company is faced with mass tort liability that threatens the viability of the enterprise, and other mechanisms either have failed or would be ineffective in avoiding the destruction of its business, it is likely to seek protection under the federal bankruptcy laws. Johns-Manville Corp.,(1) Celotex Corp.,(2) Eagle-Picher Industries, Inc.,(3) Keene Corp.,(4) and at least a dozen other asbestos manufacturers deluged with thousands of personal injury claims; A.H. Robins Co. facing potentially devastating Dalkon Shield personal injury claims;(5) Dow Corning Corp. under an onslaught of breast implant litigation;(6) and other companies--all expecting countless future claimants who have not yet manifested any injury--have sought protection under Chapter 11 of the Bankruptcy Code within the past twenty years.

When the Bankruptcy Code was enacted in 1978, Congress did not contemplate the unique problems caused by mass tort liability involving future, as well as present, claimants, or that companies facing such massive liability would seek relief under the bankruptcy laws. The Bankruptcy Code's lack of specific guidance on the treatment and dischargeability of future claims has resulted in doubts regarding the powers of a bankruptcy court to deal with mass torts. Moreover, inconsistent judicial decisions have created confusion and lack of uniformity in this area. Commentators(7) and professional organizations, such as the National Bankruptcy Conference,(8) have studied the special problems relating to the treatment of mass tort claims in bankruptcy and have made recommendations for law reform in this area. Most notably, the National Bankruptcy Review Commission(9) had recommended several revisions to the Bankruptcy Code to enable bankruptcy courts to better deal with mass tort liability involving numerous future claims tossing from the debtor's prebankruptcy conduct.(10) In addition, in 1994 Congress added provisions to the Bankruptcy Code specifically dealing with the treatment of asbestos-related liability.(11)

The growth of the mass tort phenomenon during the past twenty years also has caused the federal judiciary to consider procedural improvements for the collective resolution of mass tort liability. After several years of studying this matter, the Advisory Committee on Civil Rules of the Judicial Conference of the United States recommended that Chief Justice William H. Rehnquist appoint an informal working group to study mass torts.(12) The Working Group was formed in 1998 and, after a year of study, produced a report focusing on the problems, competing views, and possible approaches to mass torts, while recommending further study.(13)

The purpose of this Article is to discuss the positive features of the present bankruptcy system that, in general, make it a fair and effective vehicle for dealing with mass tort liability. This Article will then suggest improvements to make bankruptcy an even more effective mechanism for dealing with mass tort cases.

It is not the purpose of this paper to advocate that bankruptcy is the only, or even the best, mechanism for dealing with mass tort liability in all situations.(14) Ideally, class actions, multidistrict litigation, alternative dispute resolution, and other vehicles for resolving mass tort liability will continue to improve as mechanisms for dealing with mass tort cases. When other mechanisms fail or are likely to be ineffective, and survival of the enterprise is threatened, however, companies with otherwise viable businesses will seek protection under the. federal bankruptcy laws. The improvement of the bankruptcy system in the treatment of mass tort liability, therefore, should be a part of any comprehensive plan to improve the mechanisms for addressing mass tort liability in the American judicial system.

1. FEATURES THAT MAKE THE BANKRUPTCY SYSTEM AN APPROPRIATE FRAMEWORK FOR DEALING WITH MASS TORT LIABILITY

   1. Treatment of Enterprise-Threatening Mass Tort Liability in the Context of a Chapter 11 Reorganization Case Is Consistent with the Purposes of the Bankruptcy System

      Traditional tort litigation and nonbankruptcy collective proceedings, including class actions, are designed to grant plaintiffs appropriate relief for their injuries without regard to the financial condition of the defendant.(15) The money judgment obtained may be enforced regardless of the consequences to the defendant's viability. Although settlement negotiations often take into account the inability of the defendant to satisfy a probable award, judges and juries may not consider the debtor's financial health when awarding compensatory damages.(16)

      In contrast, while liability is determined and disputed or unliquidated claims are fixed or estimated in a Chapter 11 case without regard to the debtor's financial condition,(17) that process is only one aspect of the case. The primary goals of reorganization under the Bankruptcy Code are to provide "equality of distribution to similar creditors in a collective proceeding while ameliorating the devastating effect that a huge liability may have on the worth of a business and, correspondingly, the compensation available to all victims."(18) The protection of the business enterprise by preserving its going concern value, thereby maximizing value for distribution to creditors, is central to the reorganization process.

      The use of bankruptcy to protect a business whose viability is threatened by mass tort liability is not foreign to these underlying goals of the Bankruptcy Code. When a company has committed tortious conduct on a massive scale affecting thousands of victims, including those who have not yet manifested injury, all constituents would be disadvantaged by the destruction or termination of the business if it is otherwise viable. Those claimants whose injuries are manifested subsequent to the termination of the defendant business will have nowhere to turn for compensation. Despite its allegedly wrongful conduct, it will not benefit anyone to kill the goose that is laying the golden eggs. Rather, a plan devoting the future profits of the company, at least in part, to the compensation of present and future claimants offers the greatest likelihood that they will be compensated for their injuries. Bankruptcy's goal of providing equal treatment among similarly situated creditors also coincides with the difficult challenge of treating present claimants no better and no worse than unknown future claimants in mass tort cases.

   2. Nationwide Jurisdiction and the Automatic Stay

      Professor Edward H. Cooper has posited as a goal for dealing with mass torts the achievement of "a single, uniform, fair, and efficient resolution of all claims growing out of a set of events so related as to be a `mass tort.'"(19) To achieve this goal, he calls for eleven changes in the current framework of jurisdictional, procedural, and substantive laws and rules.(20) The first change on his list is to empower a single court to control all litigation events, select cases for mass torts treatment, and enjoin litigation in other courts.(21) A district court exercising bankruptcy jurisdiction, or a bankruptcy court to which the case has been referred by a district court, may be such a court.

      The deluge of mass tort litigation against a company often arises in multiple jurisdictions governed by different procedural and substantive laws. Duplication of discovery and other procedural steps greatly increases the financial and operational burdens on the defendant. Even class actions may arise in different jurisdictions, each with a different, narrowly crafted class. In contrast, the American bankruptcy system is governed by federal law designed to bring all disputes and claims regarding the debtor into one system. The Framers of the Constitution, anticipating the need for a single national system governing claims against distressed debtors, provided that Congress shall have the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States."(22)

      Bankruptcy jurisdiction is vested in the federal district court.(23) In addition to exclusive jurisdiction over a bankruptcy case, the district court in which the case is pending has original, but not exclusive, jurisdiction over all civil proceedings arising under the Bankruptcy Code or arising in "or related to" the bankruptcy case.(24) The district court in which the case is pending has exclusive jurisdiction over all the debtor's property, wherever located, as of the commencement of the case, and over all property...