Warren on Bankruptcy

WElizabeth Warrenhen the framers of the Constitution included a provision that Congress would have the power to establish uniform laws of bankruptcy, they may have envisioned failed land speculation schemes, crop failures, and market fluctuations that could bring hardworking citizens to financial ruin. To retain the energy and labor of these entrepreneurs and to encourage them to begin new enterprises, early bankruptcy laws permitted some debt relief. As the business dealings of America grew more complex, so did the use of bankruptcy. By the Great Depression, Congress understood that a tool to reorganize corporate entities burdened by debts it could not pay would save jobs while it paid more to the creditors than a simple liquidation could ever yield. Beginning in the 1980s, companies turned to the bankruptcy court to deal with a new problem: multiple lawsuits for problems arising from a single product. As business needs change, so does the law.

A number of companies facing massive lawsuits based on a single product have sought the protection of the bankruptcy courts: Johns Manville (asbestos), U.S. Brass Corporation (polybutylene pipe), A.H. Robins (Dalkon Shield), Piper Aviation (aircraft), Dow Corning (breast implants). The legal issues differ from case to case, but each represents an effort by a company accused of wrongdoing to bring massive tort liability under control.

The tort system is predicated on a charmingly quaint notion of resolving differences between people: One party alleges an injury and points the finger at another in court. The other defends, and a jury settles both liabilities and damages. The class action suit differs from that model, combining many similar cases, often too small to litigate individually, for a single resolution.

The mass tort suit involves finger pointing by a single plaintiff against a single defendant in front of a jury—multiplied thousands or even hundreds of thousands of times. Enough is at stake in each case to make them worth pursuing individually. Whether there is enough commonality among issues to make the cases susceptible to class actions differs from case to case, but in many cases, the injured parties don’t want class suits—or class settlements—preferring instead to take their individual cases directly to a jury. When companies file for bankruptcy in the midst of an onslaught of cases, they are effectively using bankruptcy laws to reform the case-by-case tort system.

The October 1997 Report of the National Bankruptcy Review Commission recommended that Congress amend the Bankruptcy Code to make clear the terms and conditions by which companies may file for bankruptcy to deal with mass tort liabilities. The Commission developed statutory protection for injured parties, such as the appointment of a representative to protect the rights of future claimants. The most important feature of its recommendation, however, was that the Commission validated the basic policy decision that bankruptcy courts should stop pending tort litigation and help the parties to craft mechanisms to provide multi-party compensation and release from liability. After 14 months of contentious hearings, the recommendation garnered a unanimous vote from all nine commissioners.

In bankruptcy, all claimants are pulled into a single proceeding. The Commission recommendations would authorize a number of alternatives to deal with potential liabilities, including creation of a trust to compensate those who claim injury. The trust may demand less proof than would a court, and it may pay claimants according to a pre-established schedule. Bankruptcy law specifically preserves the right of any personal injury plaintiff to have a case heard by a jury, but even with the Commission recommendations in place, a Chapter 11 filing could delay a trial and erect roadblocks, making a jury resolution more difficult.

Large companies do not readily seek the protection of the bankruptcy courts. Mass tort cases have been filed only after some plaintiffs have made sufficient progress through the courts that the threat of substantial liability is clear. The bankruptcy filing halts the progress of the pending suits, including those that may already have jury verdicts against the company. Since the companies usually have more than adequate cash to pay their current obligations—including the cases coming to judgment—there is often a charge that the filing is in bad faith. Plaintiffs are disappointed in their expectations, and the public sees a prosperous company maneuvering to avoid what a jury has determined are its legal obligations.

If a company can meet its current obligations, why let it use the bankruptcy laws to put off payment? The answer lies at the heart of the bankruptcy system: preservation of value and equality of treatment for all claimants. In effect, bankruptcy is about two questions: how to make the pie as large as possible, and how to divide it.

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