# Presentation: 263046

## Mass Tort Litigation and Bankruptcy

**2003 Third Circuit Judicial Conference**
- November 10, 2003

## The Promise of Mass Tort Bankruptcy

-  **Consistent with the Purposes of Chapter 11:** Preserve Going    Concern Value, Facilitate Negotiation, and Fair Distribution
-  Provides **Unique Power to Consolidate** Dispersed Litigation
-  Timely Access: **Insolvency Not Required**
-  Expansive and Orderly **Claims Procedures**
-  **Unique Provisions for Representation** of  Current and Future Claimants

## The Promise of Mass Tort Bankruptcy

-  **Flexible Classification** Scheme and  Impairment of Multiple Classes
-  **Flexibility in Formulating Plan**: Use of Trusts
-  **Confirmation Requirements** Protect Creditors
-  Provisions for **Closure**

**The Promise of Mass Tort Bankruptcy**

## Special Provisions Tailored to Asbestos Cases: Section 524(g)

-  History of 1994 Legislation: Johns-Manville
-  Limited in Scope: Asbestos Only, Reorganization Only
-  No Negative Inference for Other Mass Tort Cases
-  Treatment of Future Victims
-  Legal Representative
-  Channeling Injunction
-  Trust Fund
-  Voting Requirements: 75% Approval of Tort Claimants

## Historical Perspective: Have Mass Tort Bankruptcies Worked?

-  **Mixed Results** in Trust Performance
-  Relatively **Low Trust** **Payouts**
-  **Lengthy Wait** Until Payment
-  **Elimination of** **Litigation Costs, Preservation of Funds**   for Future Claimants
-  **Increase in Volume** **of Claims**
-  **Multiple** **Sources of Payment**: Other Trusts, Search for  Defendants Not in Bankruptcy
-  **Precipitation of** **Other Bankruptcies**

## What Are The Lingering Concerns About

**Mass Tort Bankruptcies?**

-  **Due Process** **Concerns**: Notice To, Representation of Futures
-  **Estimation** **of Tort Liability**: Accuracy, Use of Settlements,  and Impact on Claimant Rights
-  **Scope** **of Bankruptcy Relief**: Protection and   Participation of Non-Debtors
-  **Cost and Delay**
-  **Alternatives** to Bankruptcy

## Estimation

-  **Goal**: Determine dollar amount of unliquidated claims   in other to achieve fair allocation
-  **Particular Challenge of Mass Tort Bankruptcies**: Much of the   present, plus all future tort claims are unliquidated
-  **Reconciling Code Provisions: *****   ***Section 502( c) [estimation],   Section 1411(a) [preservation of jury trial rights],    Section 157(b)(2)(8) [core proceedings]
-  **Applicable Law**: State substantive law

## Estimation Methodology

-  Extrapolation from Prior Settlements
-  Use of Epidemiology
-  Complicating Factors: Increases in Claiming Rates,   Tort System Values, Extrinsic Events
-  Problem of Immature Torts
-  Litigation vs. Estimation

## Comparison of Procedures

**Civil Rule Litigation**
**[9014]**

**Estimation**
**[§ 502(c)]**

**Extrapolation of Liability**
**From Prior Settlements**

- • Can Use Special Claim     Forms for Current   Claims
- • Motion Practice Under
-    Civil Rules, including   R. 42 [9014]
- • Follows Federal Rules
-    of Evidence [9017]
- • Preserves Jury Trial
-    for P.I. Claims [§ 1411]
- • Determines Who Can
-    Vote [§ 1126(a)]

- • Federal Rules of    Evidence Apply
- • **Litigation** of Key Issues
-    Using Current Claims
- • **Extrapolation** to    Remaining Claims    for Estimation   Purposes

- • Uses Historical Data
- • Statistical Extrapolation from
-    Historical Settlements
- • Used to Determine Solvency
- • Does Not Preserve
-    Jury Trial Right –    Not Binding
-    On Individual Claimants
- • Does Not Determine
-    Who Can Vote

## Importance of Insurance

- 	A debtor’s insurance may be “the most important asset of the estate” in a mass tort bankruptcy.  _A.H. Robins v. Piccinin_, 788 F.2d 994 (4th Cir). *cert. denied*, 479 U.S. 876 (1986), *quoting* _In re Johns-Manville Corp._, 40 B.R. 219, 229 (S.D.N.Y. 1984).

## The Insurance Bargain	

- Transfer of financial risk to insurer
- Insurer receives right to control the defense and settlement of claims
- Insurance contract requirements: notice,cooperation, no voluntary payments orassumption of liability
- Limitations on assignment without insurer consent

## The Insurance Bargain

- 	What do policies cover?
- Liability for “damages” established through either (i) an “actual trial” or (ii) a settlement agreed to in writing by insurer, policyholder, *and* claimant;
- Liability due to an “occurrence” (*i.e*.,  “bodily injury”) during the policy period.

## Mass Tort Plans -- TDPs

- 	Mass tort reorganization plans often pay claims via a trust to which the debtor’s liabilities are transferred together with assets (including insurance) intended to pay such claims.
- Private administrative processes (“TDPs”)
- Set value of categories of claims via “matrices”
- Set requirements for claims to be regarded as valid
- No, or limited, insurer involvement

## Mass Tort Plans – TDP/Insurance Issues

- Do trusts/TDPs affect (jeopardize) the availability of coverage?
- Does assignment of policy rights/proceeds to the trust violate non-assignability clauses?

## Mass Tort Plans -- Assignability

- Policyholders/Debtors/ACCs:  Argue that debtor’s policy rights are fully assignable to the trust notwithstanding non-assignment clauses.
- state law permits assignment
- 11 U.S.C. § 1123(a)(5) “pre-empts” state law to the extent it would bar assignments:  “A plan shall . . . provide adequate means for the plan’s implementation,” including “transfer of all or part of the estate to one or more entities.”

## Mass Tort Plans -- Assignability

- Insurers:  Argue that policy rights are not assignable to the trust without their consent.
- state law prohibits assignment
- Bankruptcy Code does not expand a debtor’s contract rights beyond its pre-bankruptcy rights; § 1123(a)(5) is not applicable
- “assignment” is only for “executory contracts” under § 365, and policies generally are not “executory contracts”

## When Must Insurer Pay?

- Mass tort bankruptcy plans often provide for payment of “future claims” through the trust.
- Q:  Must an insurer pay for such future claims upon plan confirmation?
- Typically not addressed in the bankruptcy case itself, but rather in a subsequent coverage case.

## When Must Insurer Pay?

- Policyholder argument:  confirmation order establishing trust and holding trust liable to pay future claims through the TDPs is a “judgment or settlement” which the insurer must pay upon confirmation.
- policyholders often cite _UNR Indus., Inc. v. Continental Cas. Co._, 942 F.2d 1101 (7th Cir. 1991), *cert. denied*, 503 U.S. 971 (1992).
- the total amount of such future claims would have to be estimated in some fashion before a finite liability could arise.

## When Must Insurer Pay?

- Insurer argument:  policies do not require payment upon confirmation for future claims.
- there can be no liability for such claims until they are actually asserted and settled or paid.
- insurers often cite _Amatex Corp. v. Aetna Cas. & Sur. Co. (In re Amatex Corp.)_, 97 B.R. 220 (Bankr. E.D. Pa.), *aff’d*, 102 B.R. 411 (E.D. Pa. 1989), *aff’d without op.*, 908 F.2d 961 (3d Cir. 1990).
- potential impact in asbestos cases of 11 U.S.C. § 524(g)(2)(B)(ii)(II)

## The Power to Maintain Control and Produce Closure

**Related-To Jurisdiction: **

## Test for Related-To Jurisdiction

## Mass Tort Contexts in Which “Related-To” Jurisdiction

**Over Non-Debtor Litigation is Decided**

**“****Related-To” Jurisdiction**

**Requests**
**to Stay**
**(§362, §105)**

**Requests**
**to Transfer**
**(§157)**

**Plan Conf.**
**& Channeling**
**Injunctions**
**(§105)**

## Mass Tort Contexts in Which “Related-To” Jurisdiction

**Over Non-Debtor Litigation is Decided**

**“****Related-To” Jurisdiction**

**Requests**
**to Stay**
**(§362, §105)**

**Requests**
**to Transfer**
**(§157)**

**Plan Conf.**
**& Channeling**
**Injunctions**
**(§105)**

## Relevant Decisions

**“****Related-To” Jurisdiction**

***Stay***

***Transfer***

***Plan/Channel***

**[Continental]**
**[CoreStates]**

**Federal Mogul**

**Pacor**

***3d Circuit***

**Robins (4th)**
**Dow Corning (6th)**
**[Zale (5th)]**

**Robins (4th)**
**Dow Corning (6th)**

**Robins (4th)**
**Manville(2d)**
**[Zale (5th)]**

***Other***
*** ******Circuits***

## Stays

## Stays

## Transfer

## Plan Confirmation

## Channeling Injunction

## Shifting and Competing Jurisprudential Interests

**“****Related-To” Jurisdiction**

***Stay***

***Transfer***

***Channel***

**Facilitate Closure:**
**Key Element of**
**Plan Development**

**Facilitate Resolution**
**Of Key Issues**

**Protect the Estate**

***PRO:***

**Preserve Rights**
**Of Third-Party**
**Litigants**

**Preserve Rights**
**Of Third-Party**
**Litigants**

**Preserve Rights**
**Of Third-Party**
**Litigants**
**Maintain Case**
**Manageability**

***CON:***

## Negotiation and Mediation

**Negotiation and Mediation**

***Multiple Parties***

**Indemnity**
**Contribution**
**Claimants**

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Affiliates****	**

**Debtor**

**Equity**

**Parent Co.**

**Insurers**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**Public**
**Interests**

**U.S. Trustee**

## Negotiation and Mediation

**Negotiation and Mediation**

***Multiple Parties***

**Indemnity**
**Contribution**
**Claimants**

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Affiliates****	**

**Debtor**

**Equity**

**Parent Co.**

**Insurers**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**Public**
**Interests**

**U.S. Trustee**

**More Serious**
**Disease**

**Less Serious**
**Disease**

**Future**
**Claims**

## Negotiation and Mediation

**Negotiation and Mediation**

***Multiple Parties***

**Indemnity**
**Contribution**
**Claimants**

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Affiliates****	**

**Debtor**

**Equity**

**Parent Co.**

**Insurers**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**Public**
**Interests**

**U.S. Trustee**

**Directors**

**Management**

**Unions**

**Employees**

## Negotiation and Mediation

**Negotiation and Mediation**

***Multiple Parties***

**Indemnity**
**Contribution**
**Claimants**

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Affiliates****	**

**Debtor**

**Equity**

**Parent Co.**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**Public**
**Interests**

**U.S. Trustee**

**Unsettled**
**Policies**

**Pending**
**Suits**

**Insurers**

**Non-**
**Indemnified**

**Settled**
**Policies**

**No Pending**
**Suits**

**Indemnified**

**Subrogation**
**Claims**

## Negotiation and Mediation

**Negotiation and Mediation**

***Multiple Parties***

**Indemnity**
**Contribution**
**Claimants**

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Affiliates****	**

**Debtor**

**Equity**

**Parent Co.**

**Secured**
**Creditors**

**Public**
**Interests**

**U.S. Trustee**

**Trade**

**Financial**

**Insurers**

**Unsecured**
**Creditors**

## Negotiation and Mediation

**Negotiation and Mediation**

_***Assets***_

_***Liabilities***_

***Liquidated***

***Unliquidated***

## Negotiation and Mediation

**Tort System**
**Pressures**

**Committee**
**Appointment**

**Adjudications**

**Voting Power**
**§524(g); §105**

**Pre-Pack**
**Plans**

**Free Fall**
**Cases**

**“****Bolt-On”**
**Plans**

- Filing

- Confirmation

- Negotiation
- and Litigation

## Negotiation and Mediation

**Negotiation and Mediation**

***Shifting Coalitions***

**Tort**
**Property**
**Damage**

**Debtor**

**Equity**

**Insurers**

**Secured**
**Creditors**

**More Serious**
**Disease**

**Tort**
**Personal**
**Injury**

**Less Serious**
**Disease**

**Unsecured**
**Creditors**

**Futures**

## Negotiation and Mediation

**Negotiation and Mediation**

***Shifting Coalitions***

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Debtor**

**Equity**

**Insurers**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**More Serious**
**Disease**

**Less Serious**
**Disease**

**Futures**

## Negotiation and Mediation

**Negotiation and Mediation**

***Shifting Coalitions***

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Debtor**

**Equity**

**Insurers**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**Non-Serious**
**Disease**

**Futures**

**More Serious**
**Disease**

**Less Serious**
**Disease**

## Negotiation and Mediation

**Negotiation and Mediation**

***Shifting Coalitions***

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Debtor**

**Equity**

**Insurers**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**Futures**

**More Serious**
**Disease**

**Less Serious**
**Disease**

## Negotiation and Mediation

**Negotiation and Mediation**

***Shifting Coalitions***

**Tort**
**Property**
**Damage**

**Tort**
**Personal**
**Injury**

**Debtor**

**Equity**

**Insurers**

**Secured**
**Creditors**

**Unsecured**
**Creditors**

**Futures**

**More Serious**
**Disease**

**Less Serious**
**Disease**

## Negotiation and Mediation

**Negotiation and Mediation**

- SCIENCE

- LEGISLATION

- FINANCIAL MARKETS/
- FINANCING SOURCES