In Defense of Chapter 11 for Mass Torts

Abstract

This Essay argues that bankruptcy proceedings are well-suited to resolving mass tort claims. Mass tort cases create a collective action problem that encourages claimants who are worried about available recoveries to race to the courthouse to collect ahead of others. This race can destroy going concern value and lead to the dismemberment of valuable firms. Coordination among them is difficult as each claimant seeks to maximize its own recoveries. These are the very collective action and hold-out problems that bankruptcy proceedings are designed to solve. As such, bankruptcy proceedings are appropriate means of resolving mass torts as long as they leave tort victims no worse off than they would have otherwise been. We further argue that legal innovations such as third-party releases and divisional mergers, which facilitate efficient bankruptcy proceedings and reduce holdout problems, should be welcomed as long as courts are attentive to the potential for abuse.

Of course, the bankruptcy process is not fully immune to abuse. For example, incumbent managers may have outsized bargaining leverage in bankruptcy or may take advantage of information asymmetries to push for reorganizations that divert value away from tort claimants. To control for such abuse, this Essay explores potential reforms aimed at ensuring that bankruptcy proceedings effectively mitigate collective action problems without disadvantaging tort victims as a class. Some of these reforms, such as giving tort claimants a priority claim, will sound familiar to bankruptcy scholars. Others, such as giving tort claimants a right to propose a plan of reorganization are more extreme. Because all these proposals have costs and benefits, our aim is not to endorse any one set of reforms; rather we emphasize that it is possible to address potential abuses through internal reforms that facilitate mass tort resolutions within the bankruptcy system without resorting to measures that prohibit or make such proceedings unnecessarily expensive.

Keywords: Bankruptcy, Mass Tort, Tort, Litigation, Class Action, MDL, Asbestos, Federal Courts, Creditors Bargain, Texas Two-Step, Third Party Releases

JEL Classification: K2, K4, K41, K20, K13, K10, K00, K29