The Settlement Trap

Abstract

Mass tort victims often wait years for resolution of their personal injury claims, but many who successfully navigate this arduous process will not receive a single dollar of their settlement award. According to applicable bankruptcy and state law, settlement payments may be an asset of the estate that the trustee, exercising its significant authority, administers and distributes to creditors instead of a claimant who had filed for bankruptcy. This distribution power maximizes repayment, a critical counterbalance to the robust protections and benefits that debtors receive in bankruptcy.

Setting aside the perceived unfairness of taking desperately needed money from tort victims, there is something fundamentally unsettling about the process by which bankruptcy law ensnares payment of mass tort settlements. This Article is the first to identify the problem, which it dubs the “settlement trap.” Claimants in the settlement trap must seek relief from the mass tort claims administrator, the trustee, and potentially the bankruptcy court, facing costs and legal challenges at each turn. This Article explores the developing law surrounding treatment of mass tort settlements in consumer bankruptcy and identifies structural and doctrinal pressure points that impose significant confusion and costs on claimants. It supplements legal analysis with original interviews of stakeholders in the ongoing NFL concussion and pelvic mesh cases, case studies that highlight the peculiar mix of incentives that impact whether claimants receive their settlements and illustrate the potential for abuse. Finally, the Article offers a blueprint for reform.

Keywords: bankruptcy, mass torts, settlement payment, chapter 7, exemption, trustee, multidistrict litigation, plaintiffs' attorneys settlement administration, consumer bankruptcy, class action, NFL Concussion MDL, claims administrator, civil procedure, pelvic mesh, consumer bankruptcy

JEL Classification: K20, K41