Mass Tort Bankruptcy Cases

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Litigation Practice Group, was recorded on Friday, August 16, 2019, during a live teleforum conference call held exclusively for Federalist Society members.        

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is on "Mass Tort Bankruptcy Cases." My name is Micah Wallen, and I am the Assistant Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the experts on today's call.

 

      Today, we are fortunate to have with us our moderator, Doug Smith, who is a Partner at Kirkland & Ellis. Doug will be introducing our panel, and after our speakers give their opening remarks, we will then go to audience Q&A. Thank you all for sharing with us today. Doug, the floor is yours.

 

Doug Smith:  Thanks, Micah. Today, we have a really wonderful panel of experts to discuss mass tort resolution in the bankruptcy system. We have Professor Ralph Brubaker, who's the Carl L. Vacketta Professor of Law at the University of Illinois College of Law and a leading scholar in the field of bankruptcy law. Professor Todd Brown, who's not only a Professor of Law but also the Vice Dean for Academic Affairs at the University of Buffalo School of Law, who focuses on complex litigation and mass torts including resolution of mass torts in the bankruptcy system. And also Dan Prieto who's a Partner at DLA Piper, who specializes in Chapter 11 bankruptcy reorganizations, including those involving resolution of asbestos mass tort liabilities.

 

I'm sure each of these experts will provide interesting comments on this timely subject. And Professor Brubaker, if we could begin with you, that'd be great.

 

Prof. Ralph Brubaker:  Thanks, Doug. So there are many features of bankruptcy that make it a very attractive vehicle for the resolution of disputed tort claims, features that were built into the structure of the system when the bankruptcy code was enacted in 1978. Most significantly, a bankruptcy filing by a defendant facing massive tort liability gives that debtor-defendant an immediate stay of all pending lawsuits and prohibits the filing of any more suits via the statutory automatic stay in the bankruptcy code that's triggered by a bankruptcy filing.

 

And the bankruptcy filing also puts all the debtor-defendant's property under the supervision and control of the federal bankruptcy court through the concept of the bankruptcy estate which is comprised of all of the debtor-defendant's property. And any claimant that wants a distribution from the debtor's property has to file a proof of claim with the federal bankruptcy court, and any disputed proof of claim will have to be resolved before that claimant will be entitled to any distribution.

 

So that creation of the bankruptcy estate, the automatic stay, the proof of claim filing requirement, that's the biggest way in which bankruptcy essentially changes all the rules of the game as far as litigating disputed tort claims. There's this immediate centralization in one federal court as the forum for resolving all tort claims against the debtor-defendant, a centralization that's just not possible outside of bankruptcy. And traditionally, the federal bankruptcy court would resolve all disputed claims against a debtor with no jury trial through so-called summary proceedings in equity.

 

Well, enactment of the Bankruptcy Code in 1978 coincided with the earliest stages of the modern mass tort phenomenon. And it quickly became clear how that traditional method for resolving disputed claims could systematically disadvantage tort claimants in the resolution of their claims. So in 1984, amendments were enacted that gave personal injury wrongful death tort claimants the right to a jury trial in a federal district court to resolve their claims. And there's also the possibility of setting the trial forum for personal injury wrongful death tort claims in the district where the statute uses the phrase, where the claim, quote, unquote, "arose," which, of course, could counter the automatic centralization feature of the bankruptcy filing. But there's a very, very strong presumption, notwithstanding this special statutory provision, in favor of retaining the centralization in consolidation of all disputed claims in the so-called home court district where the debtor's bankruptcy case was filed and is pending, especially in mass tort bankruptcy cases.

 

Well, with respect to the automatic centralization of all disputed claims in one place that occurs from a bankruptcy filing, there's also the possibility of a non-debtor codefendant achieving the same centralization benefits without even having to file bankruptcy, which is something that the Dow Corning bankruptcy case demonstrated in the 1990s, the case dealing with silicone gel breast implants and the litigation liability arising therefrom. And the reason that's possible is because the scope of federal bankruptcy jurisdiction is very broad. Federal bankruptcy jurisdiction extends to any and all claims. The statutory term is claims that are, quote, unquote, "related to the debtor's bankruptcy case," which picks up certain claims that are made neither by nor against a bankruptcy debtor, claims between non-debtors that are nonetheless, quote, unquote, "related to the debtor's bankruptcy case." And in some circuits, especially the Sixth Circuit, which is where the Dow Corning case was, that is construed to extend to a tort claim against a non-debtor codefendant when that tort claimant also has a claim against the debtor.

 

Well, not only is the scope of federal bankruptcy jurisdiction incredibly broad through this third-party non-debtor related to jurisdiction, there's also an incredibly broad federal removal power in conjunction with federal bankruptcy jurisdiction. Any claim that's related to the debtor's bankruptcy case can be immediately removed out of the state court that it's pending in, or even in another federal court, into federal court. So if tort claims against non-debtor codefendants are related to the debtor's bankruptcy case, as soon as the debtor files bankruptcy, all codefendants can immediately remove claims against them into federal court, and a district court in the home court district of the debtor's bankruptcy case can consolidate all of those claims in the home court district under one of these special personal injury wrongful death tort claim provisions that was enacted in 1984.

 

In fact, Johnson & Johnson has tried that strategy recently in the talc litigation based upon the bankruptcy filing of one of J&J's top suppliers. The courts, though, have not been as receptive to J&J's use of that strategy as the Sixth Circuit was for codefendant Dow Chemical in the Dow Corning case because it's kind of a tail wagging the dog consolidation strategy by J&J. But the Dow Corning template is still there, especially if the bankruptcy cases filed in the circuit that more expansively construes the scope of related to bankruptcy jurisdiction.

 

So bankruptcy is a very, very powerful device for centralizing, consolidating mass tort litigation in one court which just is not possible outside bankruptcy. And then, of course, the payoff from the centralization comes via a global settlement of all that litigation. And in bankruptcy, that settlement is achieved through a plan of reorganization for the debtor, and when the bankruptcy court confirms a plan of reorganization, it will cap the debtor-defendant's liability at a fixed amount and discharge the debtor-defendant from any more responsibility to the tort claimants. And the scope of that discharge can include even future claimants who have not even been injured yet or manifested any injury, as long as the debtor's conduct that gives rise to ultimate liability occurred pre-bankruptcy.

 

Of course, binding future claimants like that obviously requires special due process protections for those future claimants, so a fiduciary future claims representative must be appointed to represent the interest of future claimants in the bankruptcy proceedings. For example, in making sure that the fund that's set aside to pay futures is large enough to pay futures the same percentage on their claims as present-existing claimants receive. But bankruptcy has proven to be a more effective way to bind future claimants to a global settlement than non-bankruptcy vehicles like class actions.

 

And with respect to non-debtor codefendants, it may be possible for them to also be included in a global settlement of all claims against them, including future claims, through a very controversial device known as a non-debtor release and injunction entered in conjunction with confirming a debtor-defendant's plan of reorganization. And the special rights that the statute gives to personal injury wrongful death tort claimants to trial by jury in a federal district court that I mentioned earlier are often times especially a moot point because the distribution procedures established by a plan of reorganization will often set up a more administrative process for resolving claims. And even if a tort claimant wants to litigate to judgment with a jury trial, and if the payout percentages are very high, like in the Dow Corning case with a 100 percent plan, they may want to go to a jury trial. There will be all sorts of hurdles to clear, including mandatory ADR processes before that claimant could ever go to trial.

 

So because bankruptcy changes all the rules of the game for litigating and resolving disputed claims against a debtor-defendant, it makes bankruptcy a very, very attractive way for a defendant to try to resolve its mass tort liability even for solvent defendants because there is no—this is surprising to a lot of people—but there is no statutory requirement that a debtor be insolvent in order to file bankruptcy. And there have been some mass tort bankruptcy cases for seemingly solvent debtors. So that's just a little background on why there has been this migration of resolution mass tort liability out of the tort system and into the bankruptcy system.

 

Doug Smith:  Thank you, Professor Brubaker. Now that we've heard a little bit about the basic statutory framework, why don't we turn to Professor Brown who I think's going to address some of the evolution of bankruptcy procedure, and in particular, some developments that have occurred with respects to asbestos bankruptcies.

 

Prof. Todd Brown:  Sure. Thank you. So just following up on what Professor Brubaker was saying, this change, this addition to the statute happened in 1994. This was Section 524(g) that expressly authorized this trust injunction approach in bankruptcy cases. There are really three big things that go on there. Number one, the debtor sets aside a significant fund that's held in trust for the victims. Number two, all of the defendant-debtor's liabilities are channeled to that fund by way of an injunction. And number three, as Professor Brubaker said, you establish distribution procedures outlining the standards the plaintiffs must satisfy to obtain payment from the fund.

 

Now, this was specifically designed for asbestos cases and applies exclusively to those cases, but it wasn't even used so much in the first few years after the adoption because the class action cases were already winding their way up through the courts. And those were effectively trying to setup the same kind of trust -- kind of settlement process. That approach fell apart after Amchem and Ortiz. And strictly speaking, this was due to the intrinsic limits of the class action device, particularly when dealing with the numerous differences among asbestos plaintiffs.

 

The Supreme Court also expressed significant concerns about the numerous conflicts among current and future victims and did not appear to be convinced that those conflicts could be easily addressed. So in short, this type of an approach, while it was still uncertain that it might work in bankruptcy, it seemed pretty clear that it would push the class device too far.

 

Now, as Professor Brubaker also said, it's always a little trickier—I'm paraphrasing here, adding my own thoughts on this—but it's a little tricky to bind those who -- these future claimants. These are people who may have no idea they were even exposed to the defendant's products, that those products contained asbestos, or that this exposure would ultimately cause a compensable injury. So our normal ideas of notice simply don't apply to these people. You can get -- of course, we can't notice them directly, and we can't even have meaningful publication notice if they don't know that that publication applies to them.

 

Even with this concern, it still seems like it might be the best option for achieving seemingly better outcomes for everyone. Victims can get timely payments, defendants can get some finality or peace, and future victims may have some assets still available to them long after they might if the company simply were left in the tort system and driven into liquidation. So it seems like it could be a win for everyone across the board, but if you're debtor's counsel trying to push one of these cases through, you still face some pretty significant issues. To get the channeling injunction, first the bankruptcy court has to appoint a future claimants' representative to address the due process concern and a hard line FCR. And what I mean by that is someone who is looking at every possible avenue to protect the interest, preserve the purpose of the trust for future victims, could slow the process significantly. And that's something that the plaintiff's bar, the debtor, the debtor's other creditors, and even a bankruptcy court isn't going to be too happy to see.

 

One of the prominent plaintiff's attorney who really pushed through a lot of these pre-packaged bankruptcies in the early 2000s would say, "We need someone we can work with." Well, how do you get this? How do you set this up? How do you have some comfort that the FCR you're going to have is going to be someone that you can work with? Well, before the filing, the plaintiffs and the debtor would typically just pick their own future claimants' representative. They would choose who was going to sit across the table from them. After the filing, they'd go to the court, ask the court to appoint that person, and they often drew objections. Usually, in the early days from insurers or occasionally others, those objections would be denied. The Department of Justice has been raising the same objections in recent cases and has been meeting similar results.

 

Now, in most cases, the result of all of this is that in most cases, but not all, the FCR seems to serve to do little more than bless what the other parties have already decided than to explore multiples avenues for protecting future claimants' interest in the trust. So that's the first step. The future claimants' representative and how that has evolved has really been that it's more there for checking the box and making sure that there is at least some argument that someone was there speaking for future victims.

 

The second is you must obtain a super majority vote of current plaintiffs in favor of a plan of reorganization. Now, this is tricky because voting tends to be handled by the attorneys representing the plaintiffs, not the individual clients. And even where you might have many attorneys of record, they often have relationship with the claimants' attorneys who are leading the negotiations. And then that result of that is that a small group of attorneys exercise extraordinary control over whether a plan will be approved and, by extension, what that plan's going to look like.

 

Unlike in other bankruptcy cases where classes that vote against a plan can be bound to the plan anyway under certain circumstances, by way of a cramdown, a channeling injunction under Section 524(g) cannot be crammed down over an unfavorable asbestos claimant vote. And so what we wind up with are trust distribution procedures that were more or less what that small group of attorneys would accept. That includes what the criteria are going to be for qualifying for payment, what those payment amounts are going to be, whether the trust will be conducting any audits, and if so, what those audits might look like. They could demand strict confidentiality if they submit claims. Other parties wouldn't be able to access any of that information including defendants who are defending themselves in the tort system against those same plaintiffs, limiting the power of the future claimants' representative and the trustee to make changes to any of this without the plaintiff's bar approval post-confirmation. So you can see how this power effectively locks in the kind of terms that they want.

 

Another step that you have to have is an estimation process. This really involves deciding how much money is going to go into the trust. How do we decide? Well, we get there by estimating the debtor's liability. Once you've done some calculations, you get the number, you fund the trust. If you've done this right, you should have enough money to pay all of the claims over time. On the surface, this looks very simple. Anyone who's done it is probably laughing right now because that's not simple at all. When you set up a fund, you are replacing the adversary process, the nuances of litigation, and replacing it with claim reviewers who are largely looking to make sure that they can check off the boxes that were set up in the distribution procedures. If something was missed, the attorney who submits the claim can withdraw it, amend it.

 

The claim reviewers really are not out there actively searching for fraudulent or abusive claims or claim development patterns. They're really just trying to make sure that the boxes are checked so that they can say yay or nay on a claim. As a result, claim volumes and severity can be grossly inflated over what the estimate was. This has, in some places, been referred to as the oversubscription problem. Especially at the beginning, these claims can flood the trust. When you set up a new fund, you're going to see a lot of new claims come in. And those new claims can come in, deplete the trust assets, and leave futures to receive a fraction of what current claimants receive today.

 

Now, this happens even outside of bankruptcy and the asbestos world. Francis McGovern's called it the Field of Dreams problem, the whole "if you build it, they will come." Specifically, if you setup a comprehensive settlement with a streamlined claim review process, claims will come out of the woodwork, including some that are specious. And if you don't have a mechanism for weeding these out before the settlement goes into operation, you're really relying on the claim administrators and your trust language to keep the fund from being overrun. This is why I think you see more and more MDLs using aggressive questionnaires in conjunction with Lone Pine orders, etc., at the early stages of the case to limit the effect of, perhaps, fast and loose claiming practices.

 

I'm not sure that we've actually seen the same degree of activity on this front in mass tort bankruptcies, especially in asbestos bankruptcies where the proof of claim, claim objection process that Professor Brubaker mentioned hasn't typically been applied in the same way that it might in an ordinary bankruptcy. And that can help explain some of the outcomes that we've seen.

 

Now, a few years ago, I surveyed the public information concerning asbestos trust performance. And the overwhelming majority of trusts at that time were paying less than a third of the amounts paid initially. Some were paying as little as one percent, even some of the then newly established trusts dropped their payments to as low as ten percent once the first round of claims were paid. Now, this was -- in part, this was because it was a bad time to go out. It was right at the peak of the last financial crisis. They were paying all present claims, including thousands that came in only after the bankruptcy process started, and they were paying them at very high values where, as I've said before, oversubscription is at its peak. So these claims -- paying out these claims devoured their principal. So even if the market had rebounded within a year or two, these trusts just weren't going to be in a position to catch up to the estimates that they had used to project the kinds of claims they could make. And, of course, once you've paid that money out, you can't enjoin gains on those funds if the market does rebound.

 

To make matters worse, the market did not rebound as quickly as had been hoped. So the net result there has been that future claimants have really not enjoyed the benefits. They have borne more of the burden than, of course, the debtors and current claimants. Now, this is still probably not that catastrophic for these plaintiffs. There always seem to be more defendants to sue in the tort system. That's another issue for another discussion. It's not really catastrophic for the debtor either. They're getting relief. They're getting peace from asbestos litigation. But it still isn't the best situation for other defendants who today were probably -- or who were mostly in the early days of this litigation were, and during the days that asbestos was at its peak, were really more on the periphery of the asbestos products world.

 

Doug Smith:  Thank you, Professor Brown, for giving us an overview of some of the problems that have arisen. Now, we'll turn to Dan Prieto who's going to give us some practical insights, having been involved in a number of the asbestos bankruptcies representing debtors.

 

Dan Prieto:  I thought what I would start with today is just talk about some of the advantages and challenges of the Chapter 11 case for resolving mass tort claims, really from the company's perspective. And I also want to touch on a recent development that may make Chapter 11 more attractive to some companies.

 

Now, before I discuss bankruptcy outright, I think it's important to put, primarily for context, to understand some of the challenges companies face in the tort system because they have an opportunity to adjust their liabilities currently in the tort system. But, for various reasons, debt is a major challenge for most companies. And I think it's generally accepted that the tort system is simply not equipped to address mass tort claims for various reasons.

 

The first reason, to me, that companies struggle with the tort system is that it is so expensive to litigate claims to a verdict. Obviously, it depends on the type of claim that you're dealing with and the type of defense counsel or strategy that the company employs, but one of my clients, it costs hundreds of thousands of dollars and as much as a million dollars to litigate a mesothelioma claim to a verdict. So even if the company believes it has very strong defenses, and even an instance where it prevails at trial, and does so repeatedly, it still has to bear the burden of significant defense costs. And so as a result, when you're dealing with thousands and thousands of claims, it may make much more sense for the company to simply settle the claims, even claims without merit, so long as the settlement value is well below the expected costs of defending the claim.

 

Also, in the tort system, it's difficult to disprove certain allegations of exposure that companies are facing. So, for instance, in the asbestos realm, we're starting to see, or has been for some time now, seeing a lot more allegations of consumers being exposed to products. So somebody will say that they 40 years ago used a product over several weekends to do a home patch and repair project, or a spouse alleging that they got exposed to dust on their spouse's clothes as they came home from work. Those types of allegations are difficult to challenge, and even if you could come up with a challenge because, for instance, maybe the product wasn't widely available in the region where the person says they purchased it at the time they purchased it. Even if you could make a challenge like that, it would cost a lot of money when you're dealing with so many claims. So again, another reason why companies find it more expedient just to settle claims even if ultimately, they don't have much merit.

 

The other phenomena that companies are facing in the tort system is that as the primary defendants went into bankruptcy themselves back in the early 2000s and over the years, the solvent defendants who were left in the tort system are experiencing more and more claims being asserted against them. And, I guess, from the company's perspective, they would say effectively that the claims that used to be asserted against the companies with big market shares and who are alleged to have caused most of the harm are now being replaced and the claims are now being asserted against the entities that remain. So it makes the situation even more challenging for the remaining defendants in the tort system because now they're facing even more claims than they typically had faced.

 

And then the final thing I'd note, and there's lots to talk about in the tort system, but just in terms of the challenges presented to the companies, that especially in the asbestos litigation, plaintiffs are able to assert their claims in what they perceive to be favorable jurisdictions, even if there's no clear connection between the jurisdiction and the plaintiff. I know these are referred to as forum shopping, and that further puts the company in a defensive posture because now they're litigating multiple claims and jurisdictions that are not viewed as favorable or beneficial to a defendant.

 

So with that backdrop, obviously bankruptcy becomes an option that companies start to consider as a way to resolve a liability. And there are some significant advantages to resolving natural liabilities through bankruptcy. I think the first one that's maybe the most obvious is that bankruptcy is the only vehicle that I'm aware of that provides a permanent resolution of the mass tort liabilities, including any future liabilities that relate to pre-bankruptcy conduct. In the asbestos context, that's pursuant to Section 524(g), which is a statute enacted by Congress, and the resolution is implemented through a federal court order. So from a company's perspective, that's pretty valuable protection.

 

I'd also note outside of asbestos, bankruptcy courts have employed similar methods to resolve non-asbestos mass tort liabilities. And one of the cases I did years ago called Kaiser Aluminum comes to mind because that case was driven primarily by asbestos liabilities and some other non-mass tort liabilities. But as part of that resolution, Kaiser Aluminum addressed all its other mass tort claims, including silica claims and hearing impairment loss claims and claims relating to exposure to coal, tar. So bankruptcy can also be used to resolve all types of liabilities in a similar fashion as 524(g) provides, and we're seeing some of that more recently with those really more recent cases.

 

The second big advantage of bankruptcy from my perspective is that, as has been mentioned earlier, is the automatic stay. And this is an enormous benefit to the company because immediately upon filing, the automatic stay stays all the litigation and the payments to asbestos claimants. And for a major defendant in the tort system, this can be a very material savings or at least a material temporary stop of having to pay the claimants because you could have defendants who are spending upwards of a hundred million dollars a year on defense and indemnity payments, and that comes to an immediate halt upon the bankruptcy. And that halt will remain throughout the life of the bankruptcy.

 

And as noted earlier, in my experience in virtually every mass tort case that I'm aware of, the stay is extended to protect non-debtor affiliates so that the claimants can't effectively get around the stay by litigating the claims against non-debtor affiliates who will then just turn around and pursue the debtor for contribution. The complete stoppage of the litigation and the savings associated with that is pretty big advantage for a company's perspective.

 

And the two other things I'd like to just highlight from the advantage, if the company has insurance that remains, and a lot of times insurance is exhausted by the time bankruptcy is considered an option, but I certainly have cases where there's material insurance that remains. One advantage of bankruptcy is that the insurance rights can be assigned to the trust for the benefit of the asbestos claimants, which is a part of the contribution package that can be given to the asbestos claimants to resolve the liability. Typically, under state law, insurance rights are not assignable, but in bankruptcy pursuant to bankruptcy code, those restrictions are overridden, and the rights can be assigned to a trust.

 

And then finally, again, as was touched on earlier, bankruptcy provides an opportunity for the company and the claimants to ask a court to estimate the liability on an aggregate basis. And this is a useful tool to help the parties, primarily, to help the parties reach a resolution on the overall contribution to a trust to resolve the liability. But it also presents some opportunities for the company that aren't available outside of bankruptcy. For instance, the company can raise a number of defenses that aren't available when you're talking about individual litigation as a claim.

 

So, for instance, if a company has historically had a very low market share, the product that's alleged to have caused the harm, yet is facing -- most of the claims based on that kind of exposure are being asserted against the company, they can argue on an aggregate basis, "This doesn't really make sense, Judge, and you should take that into account. Are low market shares relevant?" That kind of argument really wouldn't be relevant in an individual litigation of a claim.

 

Also you can raise things like suspicious naming trends. As I mentioned earlier, after the bankruptcy wave in the early 2000s, some companies have experienced a spike in claims, the company that remains in the tort system, and that's difficult to explain based on just merits of the claims alone. And then an aggregate estimation, those are the kind of arguments a company can raise.

 

Now, it's important to note that bankruptcy, while maybe providing an opportunity for companies to resolve their liability, it does present some significant challenges as well. I think that the most difficult aspect of trying to resolve mass torts in bankruptcy from a company's perspective is the power that the statute gives to claimants. You essentially need to reach an agreement -- consensual agreement with the claimants if you want to resolve your liabilities in Chapter 11, particularly if you want the protections of the Section 524(g) injunction.

 

As mentioned earlier, there's a requirement that you get 75 percent super majority votes of the current claimants. And even outside of the asbestos context, if you want a channeling injunction similar to 524(g), courts have to impose similar requirements that majority of the claimants support their restructuring. So you can't realistically force a plan or cram down a plan on claimants without any of their support first. And, if you can imagine, this dynamic tends to make negotiations difficult and protracted. And as a result, there's been a number of mass tort cases that have lasted many years, some as much as a decade or more.

 

There are some considerations that mitigate against this challenge in the bankruptcy process. And the one that I think comes to mind is that really flows from the automatic stay impact which is that as you sit in bankruptcy and the claimants and their lawyers aren't receiving payment, they clearly have an economic incentive on their own behalf to try to reach a resolution sooner rather than later so those payments can resume, both to the claimant and the lawyer. And so if a debtor is being reasonable and making a reasonable proposal to settle, that economic incentive should incentivize the claimants to, notwithstanding their super majority veto-like rights, to at least consider a reasonable settlement.

 

Also, if a debtor is being reasonable, meaning for instance, that there's been an estimation and the debtor is willing to fund a trust in the amount of the estimation or more, then from my perspective, the debtor can essentially stay in bankruptcy indefinitely and avoid making the payments to the claimants and their lawyers during the pendency of the case because I don't think a federal judge, if he or she doesn't perceive the debtor is the reason why a resolution hasn't been reached, I don't think the court will throw the debtor back into the tort system under those circumstances. And that's been my experience.

 

And then, finally, the other thing I would note in terms of mitigating this dynamic is that even if ultimately the debtor's required by the dynamics in the case to overpay and overfund the trust from their perspective, maybe put more into the trust than they believe is appropriate based on the merits of the claims, it still may be very beneficial to the company because critically, once the resolution's reached, the company will not have to ever deal with the liability and incur any of the defense costs in the future. And when we're talking about litigation like asbestos or something similar where you have a long litigation tail, avoidance of defense costs can be a very valuable component of a deal.

 

And then, the other thing I wanted to mention, obviously, is the bankruptcy, in terms of a challenge, is expensive. The company not only has to pay for its own professionals but has to pay for the other professionals of the estate representatives including the asbestos claimants committee and the future claimants' representative. And those professionals would be lawyers, financial advisors, and estimation experts, among others. But that can certainly add up in a case, particularly if a case lasts a long time.

 

And I think the last thing I wanted to touch on was just a recent development in the Bestwall Chapter 11 case which I think has some potential important implications for companies trying to resolve mass tort liabilities. Bestwall filed for Chapter 11 in November of 2017 in Charlotte, North Carolina. Bestwall is the successor to the former Georgia Pacific Company which is a consumer products company worth billions of dollars. Prior to the Chapter 11 filing by Bestwall, Georgia Pacific undertook a corporate restructuring, and this restructuring was effectuated through a Texas demerger -- I'm sorry, Texas divisional merger statute.

 

There's been, recently I believe, a similar statute enacted in Delaware. Even though it's called a merger statute, really what this is is a state law mechanism that provides if a company ceases to exist and two new companies are formed in pursuant to the merger agreement, the assets and liabilities of the company that no longer exists are assigned to each of the companies. Now, obviously, this kind of procedure is still subject to credit protection laws including fraudulent transfer, but it's a vehicle from a corporate perspective to move assets and liabilities in a certain fashion.

 

As a result of that divisional merger, the prior Georgia Pacific ceased to exist, and two new companies were formed. Bestwall, which received certain assets and liabilities of the prior Georgia Pacific, including all the asbestos liabilities and certain assets related to the historical business that led to the asbestos claims. And then the other entity that was formed was what I'll call New Georgia Pacific which received all the other businesses and assets and liabilities of the prior Georgia Pacific.

 

Now, critically, as part of this restructuring, Bestwall and the New GP entered into a funding agreement. And the funding agreement provided, among other things, that without any corresponding repayment obligation by Bestwall, the New Georgia Pacific was required to provide the funding for a Section 524(g) asbestos trust in the amount required by a confirmed plan of reorganization for Bestwall to the extent that Bestwall's assets are insufficient to provide the required trust funding.

 

In its filings in the bankruptcy case, Bestwall indicated that it did the restructuring for two main reasons. And what it provided was that first, it was to separate and align its business -- or I'm sorry, its business of managing and defending asbestos related claims with the assets and the individuals primarily related to or responsible for such claims. And then second, it did it to provide additional optionality regarding potential alternatives for addressing those claims in the future, including through the commencement of a Chapter 11 case to utilize Section 524(g) of the bankruptcy code without subjecting the entire old Georgia Pacific enterprise to Chapter 11.

 

After some initial negotiations in the bankruptcy case that did not result in an agreement, the asbestos claimants committee in the case filed a motion to dismiss the bankruptcy case. And the committee made numerous arguments about why the Chapter 11 filing was improper. Basically, what they argued was that the filing was in bad faith by Bestwall because the restructuring was designed to cabin recovery by asbestos claimants and manipulate bankruptcy jurisdiction to ultimately permit Bestwall to file for Chapter 11 in North Carolina without subjecting all of the assets and operations to a bankruptcy case. The committee also argued that the bankruptcy case was objectively futile because the funding agreement was not sufficient protection for the asbestos claimants.

 

Recently, about two weeks ago or so, the bankruptcy court in that case entered a memorandum opinion and order denying the motion to dismiss. And the court found that attempting to resolve asbestos claims through a Section 524(g) process is a valid purpose and that filing for Chapter 11 need not be due to the insolvency of the company. Court also find that Bestwall had the ability to reorganize due to its substantial assets and most importantly the funding agreement. And the Court provided it did not need to reach the issue about whether the case was filed in bad faith because it had already ruled the case was not objectively futile. The standard for dismissal, by the way, in the Fourth Circuit is that you need to show both that the case was subjectively filed in bad faith and that it was objectively futile. The asbestos committee has appealed the order and is now seeking that the appeal be heard directly by the Fourth Circuit.

 

From my perspective, the implications here are potentially significant of this ruling. First, it provides a road map on how other companies could file for Chapter 11 to address their mass tort liabilities without having to subject all their assets and operations to the bankruptcy process. And for a large enterprise that has significant operations and assets and the entity that has the historical mass tort liabilities, this may make bankruptcy a more appealing option.

 

Second, it also underscores that a company does not need to wait until it's rendered insolvent by the mass tort litigation to seek to resolve its mass tort liabilities in Chapter 11. It is enough that the volume of claims and the projected number of claims in the future create sufficient financial distress that justify a reorganization. As a result, from my perspective, the ruling in Bestwall bears watching to see if it's affirmed or not on appeal. And that's the comments I had today.

 

Doug Smith:  Great. Thanks a lot, Dan, for that update. Micah, I think we're ready for questions, if there are any questions from the audience.

 

Micah Wallen:  Not seeing a question light up the lines right away. Doug, I'll hand it back over to you if you had any additional questions, and I'll let you know if a question comes through.

 

Doug Smith:  Yeah, I do have one question for the panel. Professor Brown, you touched a little bit on the problems with how the trusts have been working and the appointment of the future claims' representative. I don't know if you or any of the other panelists would care to touch on the Department of Justice's recent interventions in some of these asbestos mass tort bankruptcies. There seems to be a concern, the same concern that you were expressing about the way the claims have been handled and the potential for claims that shouldn't be getting compensation to get compensation in these trust arrangements.

 

Prof. Todd Brown:  Sure. So the Department of Justice has been raising similar objections to the ones that were raised twenty years ago. These objections really focus on the idea that the future claims representative's raison d'être is to protect the rights of future victims and they have -- because of the way they are appointed, the way that they resume this process, etc., they have personal interest in getting along and not rocking the boat. In fact, I think [in] pleadings in some of these cases, you'll see quotes from different people who have been appointed to these roles where say exactly that. "Look, my job isn’t to rock the boat. It's to point out things that I think might help us get more money into the trust, etc., but I'm not going to come in and say well, maybe we need a more robust or [inaudible 44:07]."

 

      And the idea here is that this is a very unique kind of fiduciary because this is a unique kind of fiduciary, and with no one else there to speak for them, no one to supervise whether they're actually actively pursuing their role, and so what we wind up with is a conflict between the desire to get these cases across the finish line and the purpose of the role to protect people who are not there to protect themselves.

 

Doug Smith:  I just wanted to thank all of our panelists and say it'll be interesting to see how much in the future defendants are resorting to the bankruptcy system. It seems like there is a renewed interest with some of these asbestos bankruptcies and even the non-asbestos mass torts with defendants taking advantage. And I just wanted to thank the panelists for talking a little bit about the benefits and some of the downsides of Chapter 11 for resolving mass torts and thank everybody that took the time to listen to this call. 

 

Micah Wallen:  And on behalf of The Federalist Society, I'd like to thank all of our experts for the benefit of their valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.