Bankruptcy Experts Debate Intersection of Mass Torts and Bankruptcy

Perhaps the debate over whether multidistrict litigation or bankruptcy is a better vehicle to resolve mass torts need not be binary.
U.S. Bankruptcy Judge William Lafferty III of the Northern District of California, Leslie Brueckner of Singleton Schreiber and Professor Andrew Bradt of UC Berkeley School of Law discussed the increasingly busy intersection of mass torts and bankruptcy last month as part of a discussion sponsored by the school’s Civil Justice Research Initiative and moderated by Anne Bloom, the initiative’s executive director.
Much of the recent conversation has centered on the “Texas Two-Step,” a maneuver used by companies, including 3M and Johnson & Johnson, in attempts to create corporate entities that assume mass tort liabilities that are separate from their operating companies. But Bradt said there’s a sense that companies using the bankruptcy mechanism to resolve mass tort liability is somehow a new thing. “It’s, of course, not,” he said, alluding to decades’ worth of bankruptcy proceedings involving asbestos.
“The system of bankruptcy procedure is very well designed to achieve closure. That’s really the point of bankruptcy,” Bradt said. “It’s a way for a debtor to go into bankruptcy, resolve their liabilities and then come out the other side with a fresh start.” What’s new in bankruptcy, he said, is that companies that otherwise don’t seem to be distressed are tapping it to deal with mass tort liabilities.
By comparison, Bradt said the strengths of multidistrict litigation lie in fact-finding — using trials and motion practice to accurately evaluate the plaintiffs’ injuries. The MDL process, he said, gives plaintiffs the opportunity to decide for themselves whether they want to opt in to any settlement or not. Where the bankruptcy process can force dissenters into a settlement, the MDL process cannot. “So to some degree, this bankruptcy versus MDL problem is boiling down to who’s better off?”
Brueckner of Singleton Schreiber, who represents plaintiffs primarily in appellate proceedings, noted that there are sharp divisions in the bar and the legal academy about who ends up better off in either system. “Some people believe that tort victims actually do better in the bankruptcy system, because it means that everybody — all creditors — get a seat at the table, and everybody gets a piece of the pie,” she said. However, she noted that the bankruptcy system lacks the sort of discovery that can help air corporate misconduct and allow injured plaintiffs to tell their story. “The focus is on accountability, not equitable distribution,” said Brueckner of the civil justice system available to plaintiffs in MDLs.
Judge Lafferty pointed out that in dealing with the question of whether a debtor has filed for bankruptcy in “good faith,” his colleagues on bankruptcy courts across the country are dealing with something that’s been developed in the case law. “There is nothing in the code that says how you define that. There’s no requirement in the bankruptcy code that you be insolvent to file a bankruptcy case,” Lafferty said.
The judge pointed out that Chief Bankruptcy Judge Michael Kaplan in New Jersey offered up a “full-throated” defense of the bankruptcy system’s ability to deal with mass torts in his first decision denying a motion to dismiss in the talc-related bankruptcy case of Johnson & Johnson affiliate LTL Management LLC. Lafferty pointed out that the subsequent Third Circuit decision reversing Kaplan’s ruling was written by Third Circuit Judge Thomas Ambro, whom Lafferty called “a brilliant bankruptcy lawyer before he was on the Third Circuit.”
Although Ambro’s decision didn’t directly say an operating company should be forced to file for bankruptcy itself, Lafferty said many people are reading the decision to say perhaps the price of admission for bankruptcy — where parties’ rights are so fundamentally affected — should include facing all the inconveniences that come with it. “Essentially, there’s an urgency to get things done,” said Lafferty of the prospect of having an operating company in bankruptcy. “When you have another entity who goes in, you sort of disconnect the inconveniences of bankruptcy from all the benefits.”
Bradt agreed. “If you are a debtor in bankruptcy, you are getting a lot of things that you’re not going to get just as a regular defendant,” he said. The debtor, he noted, gets an automatic stay of all litigation and the ability to pass a restructuring plan — essentially a settlement — based on either a super majority or three-quarters majority vote of the creditors, with the dissenters bound to the plan. “It’s crammed down, whereas in multidistrict litigation, you don’t get any of those benefits,” he said. “I think that what Judge Ambro is saying, in part, is that we’re not going to let you get all of the benefits that we would normally give to a truly distressed debtor over the litigation system, unless you are entitled to them. And the fear is that, well, if you manufacture them artificially, then you’re going to get these debtor-based benefits of the bankruptcy system without being the sort of party that ought to be entitled to them.”
Lafferty also pointed out that he and his colleagues on the bankruptcy bench lack the power to try personal injury claims. “What I can do is set up the structure to allow people to see if they’re willing to get into a discussion about how this will be resolved,” he said. “It turns into a very extensive and very complex mediation, which either results in a deal or it doesn’t.”
Lafferty pointed to bankruptcy cases involving Catholic dioceses, where he and other bankruptcy judges across the country have allowed those bringing abuse claims against the church to tell their stories as part of the process at the suggestion of creditors’ committees. “This is meaningful to these people, and this is at least a tiny piece of that agency that they lost when they weren’t able to go to a jury,” he said.
Bradt, for his part, suggested that the Judicial Panel on Multidistrict Litigation might want to consider transferring MDLs to the place where a bankruptcy is seated in instances where the company facing mass tort claims ends up in bankruptcy. That would, he said, allow the bankruptcy court and the MDL judge to perhaps leverage both systems’ “comparative advantages.”
“In a world where there’s uncertainty about how this pans out, the panel could decide to try to experiment along those lines, and I’d be surprised if we couldn’t find some synergies.”
Brueckner agreed that there’s more potential for the MDL system and bankruptcy courts to work together than what has played out so far, especially since bankruptcy courts don’t try the merits of the underlying claims. “There’s lots of ways you can imagine these systems could really work in better harmony than we’ve seen so far,” she said.