Chapter 11: A New Refuge for Survivors?

10.01.21

For centuries, asbestos was revered by different civilizations because it showed no marks when thrown into fire. Some Persians believed the mineral was harvested from the backs of fire-proof salamanders and used it as a fun party trick to impress guests. Others saved the material for burial rites, protecting the body from heat until it disintegrated into a fine black ash.

This ancient fascination was soon commercialized, weaving its way into “textiles, line automobile brakes, retard shipboard fires,” and rocket bindings. As District Court Judge Jack B. Weinstein remarked, “[t]heatrical audiences were once comforted by the thought that huge asbestos curtains between the audience and stage protected against the spread of fire.”

And then the cancers appeared, revealing the hidden dangers of a mineral that plays with fire. What followed was a litigation beast never before seen in its scale or complexity. By 1991, 715,000 asbestos claims were pending in federal and state courts, threatening to overwhelm the judiciary. A committee established by the Judicial Conference of the United States concluded that the “situation ha[d] reached critical dimensions and … the courts [were] ill-equipped to [handle this disaster.]” It threw up its hands and called for a “national solution” proposed by Congress.

Congress responded with fifteen failed bills and an amendment to the bankruptcy code: section 524(g), a special codification specifically tacked on for debtors facing asbestos liabilities. Troublingly, mass torts rarely involve asbestos claims today, yet the aging legal and bankruptcy structures built around them have failed to evolve.

Today, mass torts are more likely to involve the opioid crisis, sexual abuse victims, defective products, or environmental disasters. While the bankruptcy code offers bespoke solutions for asbestos cases, it has far less guidance to offer these cases. Below, we discuss the strange new world of mass tort bankruptcies — who they help, who they harm, and what options are available for reform.

What Options Do Mass Torts Victims Have?

Mass tort victims have few options for recourse. The class action, once a popular means of resolution, faded from relevance following two 1990s Supreme Court decisions (Amchem and Ortiz) that basically eliminated the option for most mass tort cases. Multidistrict litigation (MDL) rose to fill the void and successfully compensated victims for a number of egregious harms, whether from defective products, fatal pharmaceuticals, or asbestos (MDL №875, aka the “black hole,” was created to manage all asbestos personal injury and wrongful death cases: it is the largest and longest-lasting MDL to date.)

Nonetheless, MDLs come with their own set of baggage, including delays, captive settlements, and diminished victim input (we have discussed a few of them here). Samir Parikh, a bankruptcy law professor at Lewis & Clark Law School and the editor-in-chief of Bloomberg Law Bankruptcy Treatise, is especially critical of how MDLs afford victims little control. “Cases are guided by steering committees, and plaintiffs’ attorneys and the MDL judge exercise absolute resolution control,” he writes. “A truly surprising facet of the process is that victims are unable to exit. The MDL process is more akin to a prison than a bus stop.”

Survivors themselves are remarkably dissatisfied with the process. In the first ever survey of MDL plaintiffs (publication is forthcoming in the Cornell Law Review), just 1.8% of respondents reported that the litigation accomplished what they had hoped. MDLs are unusually long-winded: they last nearly four times as long as the civil case. Despite this, participants were so desperate to tell their story that 60% of them would have been willing to wait longer (some up to five years more). “I absolutely feel like I don’t matter,” wrote one respondent. “I would even say I kinda feel like my attorney just wishes I would die so they could forget about the whole thing.”

MDLs’ fixation on settlement and efficiency has taken a heavy toll on survivors’ trust and goodwill. “Law firms’ Costco-type warehousing seems to leave clients feeling deeply dissatisfied with nearly all aspects of their attorney-client relationship,” the authors concluded. “Our judicial process is very broken.”

Increasingly, mass tort defendants are eschewing the MDL process entirely in favor of bankruptcy. The last decade saw a rising number of high-profile cases — Purdue Pharma, Boy Scouts of America, USA Gymnastics, PG&E, etc. — shift from state and federal systems to bankruptcy courts (whether or not this simply replaced one deficient system with another is up for contention).

The Restorative Powers of Bankruptcy

Some argue that Chapter 11 has many benefits over civil litigation, in that it eliminates a frenzied race to the courthouse, reduces inequitable treatment, and ensures a future income stream to fund recoveries (by restructuring rather than liquidating the debtor). This has been argued since the very first asbestos bankruptcy case, Johns-Manville, which argued that “it needed to survive in order to pay future asbestos claims and it was critical not to kill off the goose that laid the golden egg.”

But there are non-monetary benefits as well. The Catholic Church, which saw twenty-nine dioceses or religious orders file for bankruptcy protection as of November of 2020, provides an interesting case study for some of the more restorative aspects of bankruptcy.

Meredith Edelman, a legal scholar whose work focuses on institutional accountability for clerical child sexual abuse, was surprised by how bankruptcy proceedings took survivor voices into account. She compared several high-profile Diocese class actions in the US with less well-known bankruptcy suits. Bankruptcy proceedings were less emotionally fraught for survivors and provided them with a number of non-monetary provisions including “personal and public apologies, publication of survivors’ stories, implementation of new prevention efforts, publication of names of credibly accused clerics, release of documents and symbolic acknowledgements of abuse.” Survivors complained that these remedies for emotional relief — while also available in civil litigation — were often ignored outside of a bankruptcy context because they were harder to enforce.

The other interesting dynamic in mass tort bankruptcy is that creditors are primarily made up of clients-turned victims. In order for USA Gymnastics or Boy Scouts of America (BSA) to exit Chapter 11 successfully, a plan needs to be approved by a majority of claimants in a class of creditors. This at least gives survivors a chance to vote, participate in the redistributive process, and to hear arguments from their lawyers (in most MDL cases, plaintiffs had no idea who their lawyers were).

Bankruptcy Grifters

Critics of mass tort bankruptcies argue that it allows defendants to exploit statutory loopholes for their own benefit, enjoying the enormous protections awarded by bankruptcy with none of the accompanying responsibilities.

Non-debtor releases — the exemption of third parties from liability in exchange for a financial contribution to the victims’ trust — are particularly contentious. Lindsey Simon, an assistant professor at the University of Georgia School of Law, refers to solvent, non-debtor parties as “bankruptcy grifters,” or parasites “receiving many of the substantive and procedural benefits of a host bankruptcy but incurring only a fraction of the associated burdens.”

Thanks to our outdated bankruptcy code, non-asbestos cases have no code-based limitations on participants. Companies have used this to their advantage to extend protection to third parties (Purdue Pharma brought the Sacklers under its wing, whereas USA Gymnastics pulled in the United States Olympic and Paralympic Committee (USOPC) and a number of individuals connected to a training facility used by Larry Nassar).

The recent Purdue Pharma settlement, which granted immunity to the Sackler family in exchange for a $4.35 billion contribution to the company’s bankruptcy estate, was quick to provoke scorn. “How extraordinary it is for a bankruptcy plan to enjoin a state attorney general from doing its consumer protection job against third parties that weren’t even in bankruptcy,” stated one objector.

Why do judges allow this? Expediency and economic efficiency. “There is $3 billion on the table that could walk away if the Sacklers do not receive the protections they want from Chapter 11,” wrote Simon. (The amount increased to $4.35 billion by the time of settlement). “Whether or not the amount is fair, it’s a significant sum that could meaningfully help many people and communities that really need it.”

Where Now?

Many hope that Congress will act to close current bankruptcy loopholes and update the code for more contemporary cases. In response to public outrage over the Sackler settlement, a number of representatives and senators have already proposed the Nondebtor Release Prohibition Act, which would prohibit releases for parties whose assets aren’t subject to creditors’ reach in bankruptcy court.

“The bankruptcy process is supposed to provide a fresh start, not a license for the powerful — from the Sackler family … to the people who enabled years of abuse of Olympic gymnasts, boy scouts, and young parishioners — to prey on ordinary Americans,” said Representative Jerrold Nadler.

Given its increasing popularity with scandal-ridden mass tort cases, the bankruptcy code is unlikely to escape the limelight (or calls for reform) for some time. “In this #MeToo era, I anticipate seeing more nonprofits become mired in damaging allegations and subsequently filing for bankruptcy under these circumstances,” predicted one bankruptcy law expert.

But some believe turning to the bankruptcy code for justice is already a case of misplaced hope. “Justice is not a core bankruptcy concept,” said Simon. “What a lot of people want — holding alleged wrongdoers accountable — isn’t what the process is designed to do.”

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