Claim Durability and Bankruptcy's Tort Problem
52 Pages Posted: 18 Nov 2020 Last revised: 18 Jun 2021
Date Written: November 15, 2020
Bankruptcy has a tort problem. Chapter 11 predictably subordinates the claims of tort and other involuntary creditors to those of financial lenders, a fact which encourages firms to rely excessively on secured debt and discount the interests of those they might incidentally harm. For this reason, many scholars have advocated changing repayment priorities to move tort creditors to the front of the line. But despite broad academic support for a new “super priority,” the idea has yet to inspire legislative action.
This article proposes an alternative solution rooted in tort claims’ temporal durability rather than their priority. Chapter 11 subordinates tort claims only because of a convention that assets should emerge free-and-clear of pre-petition debts if those who control the reorganization so elect. Bankruptcy courts could buck the convention and insist that tort claims follow a debtor’s assets out of Chapter 11 unless a deal otherwise is struck. The theoretical insight motivating our proposal is that durability and priority are close substitutes. In broad strokes, a super-durability norm should produce similar effects to a super-priority rule. In some respects, using durability may in fact be superior. It could avoid the need for costly, inaccurate judicial efforts to estimate the extent of debtors’ tort liability. It could also be implemented by judicial fiat and without new legislation. Whatever one thinks of implementation, taking claim durability seriously as a design variable raises questions—and extends recent debates—about when bankruptcy law needs to crystallize otherwise fluid legal relationships to achieve its ends.
Keywords: Chapter 11, bankruptcy, tort, tort claims, environmental claims, free and clear, free-and-clear, section 363 sales, going-concern sales, successor liability, super priority
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