TO: Commissioners, Advisors Parties Interested in Mass Future Claims
FROM: Working Group on Mass Future Claims
DATE: June 17, 1997
RE: Mass Future Claims Proposal
By enacting the asbestos amendments in the Bankruptcy Reform Act of 1994, Congress offered the first step in providing legislative guidance to ensure equitable treatment to mass future asbestos claimants in bankruptcy. However, Congress also has recognized the potential need for a mechanism to deal fairly with non-asbestos mass future claims. [ FN: "The Judiciary Committee expresses no opinion as to how much authority a bankruptcy court may generally have under its traditional equitable powers to issue an enforceable injunction of this kind. The Committee has decided to provide explicit authority in the asbestos area because of the singular cumulative magnitude of the claims involved. How the new statutory mechanism works in the asbestos area may help the Committee judge whether the concept should be extended into other areas." 140 Cong. Rec. H 10765, 10766 (Oct. 4, 1994).] The asbestos amendments have not precluded the use of bankruptcy to deal with other types of mass future claims. [ FN: See, e.g.,In re Eagle-Picher Indus. Inc., 203 B.R. 256, 267 (S.D. Ohio 1996) (permitting inclusion of lead personal injury claims in trust in addition to asbestos claims, and establishing trust for property damage claims as well).] Yet, although some courts have confirmed plans that dealt with future liabilities through the use of trusts and channeling injunctions without statutory guidance, the uncertainty surrounding the validity of these procedures has had adverse effects. [ FN: "[T]he lingering uncertainty in the financial community as to whether the injunction can withstand all challenges has apparently made it more difficult for [Johns-Manville] to meet its needs for capital and has depressed the value of its stock. This has undermined the ‘fresh start objectives of bankruptcy and the goals of the trust arrangement. " H.R. Rep. No. 103-835 (Oct. 4, 1994). This uncertainty has been a continuing theme throughout the published case law. Well before the 1994 amendments, the district court in UNR cited the lack of Congressional authorization when it refused to appoint a representative to file claims on behalf of future injured parties. SeeIn re UNR Indust. Inc., 29 B.R. 741, 748 (N.D. Ill. 1983), app. dismissed, 725 F.2d 1111 (7th Cir. 1984), motion to reconsider granted, 46 B.R. 671 (Bankr. N.D. Ill. 1985) (appointing representative under section 105 to represent future claimants who were "parties in interest ") .]
The asbestos amendments constituted the first step in dealing with mass future claims. This proposal offers the second step. The Commission's proposal is not intended to be the finalword on how to deal with all future claims, but instead seeks to provide a conceptual framework for developing fair, workable solutions in a complex area. The proposed provisions should help create a mechanism for the payment of damages for mass future claims stemming from products such as intrauterine devices and silicone implants. Similarly, the framework would apply to mass future contract claims resulting from defective products that cause extensive and expensive property damage but do not necessarily cause personal injury. Examples include polybutylene pipe, crop-destroying fertilizers, and defective heat pump thermostats.
The objective in both reorganizations and liquidations that involve mass future claims would be to further the equality of distribution among claimholders, to preserve the going concern value of viable businesses, and to enhance the likelihood of compensation for parties who, because of the size of their claims in the aggregate and the collection delays, might otherwise end up with nothing.
1. The Definition of Mass Future Claims
This proposal attempts to clarify not only what mass future claims are, but when they can be treated and discharged in bankruptcy. Under the present system, debtors and plan proponents have been afforded vastly different degrees of latitude in bringing mass future claims into the bankruptcy process due to uncertainty over whether the inclusion of these claims is authorized or appropriate. [ FN: Tests employed to determine whether a potential liability is a claim include the conduct test, seeIn re A.H. Robins Co., 839 F.2d 198 (4th Cir.), cert. denied , 487 U.S. 1260 (1988), the prepetition or preconfirmation relationship test, seeIn re Piper Aircraft Corp., 58 F.3d 1573 (11th Cir. 1995), and the accrued state law claim test, seeIn re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984), cert. denied , 469 U.S. 1160 (1985). These tests yield widely divergent results.] Some courts will not recognize an interest at all if a cause of action has not accrued under non-bankruptcy law. [ FN: See, e.g., In re M. Frenville, 744 F.2d 332 (3d Cir. 1984) (automatic stay did not enjoin creditor action against the debtor, even though debtor s predicate act occurred prepetition, since actual cause of action did not accrue prepetition). Some courts continue to recognize the reasoning of Frenville. See, e.g.,In re Kewanee Boiler, 198 B.R. 519, 528 (Bankr. N.D. Ill. 1996), remanded on other grounds, 1996 WL 556736 (N.D. Ill. Sept. 26, 1996).] Other courts have considered mass future claimants "parties in interest" under section 1109, not holders of "claims." [ FN: SeeIn re Amatex Corp., 755 F.2d 1034 (3d Cir. 1985), rev g 37 B.R. 613 (E.D. Pa. 1983);In re UNR, 46 B.R. at 674. Even in the widely-cited Johns-Manville case, the treatment of future claims was not predicated on a finding that future claims were actually "claims. "In re Johns-Manville Corp., 36 B.R. 743 (Bankr. S.D.N.Y. 1984), aff d, 52 B.R. 940 (S.D.N.Y. 1985).] Still other courts believe that the current definition of claim, which includes unliquidated, contingent, and unmatured liabilities, encompasses mass future claims; these courts have permitted plan proponents to provide for and discharge mass future claims. [ FN: See, e.g., A.H. Robins Co., 839 F.2d at 201;In re Eagle-Picher Indus. Inc., 134 B.R. 255 (Bankr. S.D. Ohio 1991).] Taking this one step further, however, at least one court has permitted remote and unanticipated claims to be discharged without identification, representation,or treatment in the plan. [ FN: See, e.g., Texaco Inc. v. Sanders, 182 B.R. 937 (Bankr. S.D.N.Y. 1995) (unnoticed and untreated liabilities of debtor were claims that were discharged in bankruptcy).]
This proposal recognizes the viability of some mass future claims, but the constraints and limitations in the proposed definition of mass future claims are intended to provide a gatekeeping function to limit the ability of debtors to channel claims away from the assets of the reorganized debtor if those claims are so unforeseeable or speculative that they are not reasonably capable of approximation. With this objective in mind, this proposal is not designed for debtors that may wish to eliminate discrete potential future liabilities while they happen to be in bankruptcy.
A definition of "mass future claim" should be added as a subset of the definition of "claim" in 11 U.S.C. § 101(5). "Mass future claim" should be defined as a claim arising out of a right to payment, or equitable relief that gives rise to a right to payment that has not accrued under non-bankruptcy law that is created by one or more acts or omissions of the debtor if:
1) the act(s) or omission(s) occurred before or at the time of the order for relief;
2) the act(s) or omission(s) may be sufficient to establish liability when injuries ultimately are manifested;
3) at the time of the petition, the debtor has been subject to numerous demands for payment for injuries arising from such acts or omissions and is likely to be subject to substantial future demands for payment on similar grounds;
4) the holders of such rights to payments are known or, if unknown, can be identified or described with reasonable certainty; and
5) the amount of such liability is reasonably capable of estimation.
The definition of "claim" in section 101(5) should be amended to add a definition of "holder of a mass future claim," which would be an entity that holds a mass future claim.
The proposed definition would provide a more uniform and constrained conception of the appropriate circumstances in which to recognize and treat the claims of mass future claimants in both reorganization and liquidations. Recognizing this group of claimants in a structured fashion ensures that parties with such claims will be represented and will receive compensation. The definition would not permit a broad and generic discharge of speculative liabilities; rather, it is intended to limit the claims eligible to be "mass future claims" to those significant tort and contract liabilities that meet the specified standards.
An example: Company X, a pipe manufacturer, is litigating numerous cases regarding polybutylene pipes that cracked from contact with water containing certain chemicals and caused damage to the walls in peoples homes. This type of pipe system was installed in millions of homes, thus, although Company X already had stopped producing this type of pipe, Company Xcould anticipate significant future liability on account of the pipe previously manufactured and installed. The pipes might not start to leak until after many years of use once a local water supplier adds such chemicals to the water. Unlike a pipe company that has been sued sporadically for occasional and different problems with pipes of varying composition and continues to produce those pipes (which would not fit the standards of the mass future claims definition), Company X might be an appropriate candidate to use the mass future claims mechanism. Its potential liability for a clearly delineated type of damage claim, with liability that might extend far into the future, may decrease public confidence in Company X and affect its access to the capital markets. [ FN: Polybutylene pipe has been the subject of litigation in the U.S. Brass Corp. bankruptcy and products liability cases. However, the facts of this example are not intended to reflect accurately all the details of those cases.]
The proposed definition of mass future claim would be a subset of the definition of a claim under 11 U.S.C. § 101(5). This ensures that mass future claims receive the statutory entitlements of claims generally, such as voting and being protected by the best interest of creditors test under section 1129(a)(7). As mentioned previously, many cases that have authorized the treatment and channeling of future liabilities have not afforded mass future claimants "claim" status, due in part to the uncertainty about the authority to do so. Likewise, the 1994 asbestos amendments in section 524 do not speak in terms of "claims" and thus create uncertainty when trying to interpret the rights of future asbestos victims in the context of other Bankruptcy Code provisions.
This proposal has been developed in contemplation of the types of massive liabilities that can threaten the viability of an enterprise. In light of this goal, Commissioner Jones and other parties have questioned whether the definition of mass future claims should include a threshold requirement that potential mass future claims liability will make the debtor insolvent. The definition was crafted without an insolvency requirement for two reasons. First, such a requirement would exclude some companies that otherwise would be paradigm candidates for the use of the mass future claims provision. For example, an asbestos manufacturer with looming future liabilities may not be nearing insolvency on a cash basis, but may be cut off from financial markets and cannot raise money for capital investments and ultimately will not be able to operate. [ FN: "Another basic bankruptcy goal, that of debtor rehabilitation, justifies an early resolution of future tort claims. To preserve the firm s equity and pay early-maturing claims while huge but future claims hang over the firm could bring about the firm s operational collapse . . . the enterprise is likely to be affected severely and adversely. Access to capital markets will be reduced. The enterprise will shrink; contract claims will mature and be paid. Worthwhile projects will be foregone. Stockholders will be motivated to march the firm down risky paths. Customers and suppliers will flee. Mergers will be barred; management, no longer fearful of ouster by merger, might slacken its performance. To the extent it performs, it must donate its time and energy to the resolution of the firm s financial troubles, not to operations. An early resolution of a large, contingent tort liability may be necessary, not just to serve distributional norms of creditor equality and priority, but also, as an important bankruptcy value, to prevent the debtor firm s operational collapse. " Mark J. Roe, "Bankruptcy and Mass Tort, " 84 Colum. L. Rev. 846, 855 (1984).] Second, because insolvency is a malleable concept, a company could plan around such a requirement without much difficulty by changing its capital structure or overleveraging itself such that the balance sheet would indicate that potential future claims will put the enterprise over the brink of insolvency. For these reasons, an insolvency predicate seems to be neither a desirablenor an effective method of capturing the appropriate group of cases.
The proposed definition of mass future claims does not encompass police and regulatory causes of action and alters neither the debtor's ongoing obligation to comply with applicable laws nor the government's ability to act in its policy and regulatory capacity. As observed by the U.S. Department of Justice, [ FN: Letter to Chairman Brady C. Williamson from Francis M. Allegra, Deputy Associate Attorney General, U.S. Department of Justice, May 12, 1997; Letter to Chairman Brady C. Williamson from Lois J. Schiffer, Assistant Attorney General, U.S. Department of Justice Environment and Natural Resources Division, May 12, 1997.] police and regulatory causes of action are of a different nature than mass future claims and do not fit within the definition and scope of this proposal. The recommended amendments would not alter a debtor's obligation to operate its business and maintain its on-site conditions in compliance with all applicable laws, regardless of whether a hazard or condition existed pre-bankruptcy. To the extent that government entities currently can regulate post-bankruptcy behavior of debtors whose pre-filing acts or omissions injured known claimants, government entities should be equally able to regulate debtors whose behavior injured unknown claimants. In other words, the fact that a future claims representative pursues claims on behalf of unknown claimants would have no effect on the government's ability to act pursuant to its police and regulatory capacities post-bankruptcy. The incorporation of additional private claimants into the bankruptcy process does not affect the ability of the government to exercise its functions. However, Commissioner Jones objects to the lack of explicit exclusion of police and regulatory claims in the definition of mass future claims.
Aside from adding a subset of claim known as a "mass future claim," this proposal would not curtail or otherwise change the meaning of "claim." The definition of all other claims, including "contingent," "unliquidated" and "unmatured," would be unaffected by this provision.
2. Protecting the Interests of Holders of Mass Future Claims
Procedural due process requires that, insofar as is practicable, a claim holder receive notice and the opportunity to be heard. [ FN: See Mullane v. Central Hanover Bank and Trust Co., 339 U.S. 313 (1950). "To achieve that end, the court may well craft a combination of devices, including publication notice and the appointment of a class representative. " In re Fairchild Aircraft Corp., 184 F.2d 910 (Bankr. W.D. Tex. 1995) citingIn re Agent Orange Product Liability Litigation, 996 F.2d 1425 (2d Cir.1993). " What process is due in a given instance requires the balancing of a variety of interests. In some cases, ‘the marginal gains from affording an additional procedural safeguard ... may be outweighed by the societal cost of providing such a safeguard. " Agent Orange, 996 F.2d at 1435, citing Walters v. National Ass'n of Radiation Survivors, 473 U.S. 305, 320 (1985). The Fifth Amendment of the Constitution may not extend due process protection to an inchoate claim. See, e.g., Ralph R. Mabey & Jamie Andra Gavrin, "Constitutional Limitations on the Discharge of Future Claims in Bankruptcy, " 44 S.C.L. Rev. 745 (1993); Silver v. Silver, 280 U.S. 117, 122 (1929). However, the Working Group seeks to promote fairness to mass future claimants even if not constitutionally required.] The bankruptcy system may be more protective of massfuture claimants rights than other means, especially with the implementation of these proposals. [ FN: See, e.g., John C. Coffee, Jr., "Class Wars: The Dilemma of the Mass Tort Class Action, " 95 Colum. L. Rev. 1343, 1350 (1995) (asserting that defendants have learned how to limit their tort liability in mass tort class actions and solicit plaintiffs' attorneys to bring such class actions, all of which uniquely disadvantages future claimants).] Some believe that the fundamental rules in bankruptcy (e.g., the absolute priority rule) provide greater safeguards for the interests of mass future claimants, than do class actions under Rule 23 of the Federal Rules of Civil Procedure. [ FN: Id., at 1383. See Federal Rule of Civil Procedure 23(b)(1)(B) (permitting mandatory class action to be certified where prosecution of separate actions would create risk of adjudications for individual class members that would, as a practical matter, be dispositive of interests of the other members not parties to adjudications, or would substantially impair or impede their ability to protect their interests).] In addition, one circuit court of appeals panel has upheld the settlement of a non-opt-out future claims class action and also held that the use of one class counsel for both present and future claimants did not constitute a conflict of interest. [ FN: Flanigan v. Ahearn (In re Asbestos Litigation), 90 F.3d 963, 982 (5th Cir.), rehearing en banc denied, 101 F.3d 368 (5th Cir. 1996), cert. pet. filed, 65 USLW (Feb. 27, 1997). Cf. Georgine Products Inc. v. Amchem Products Inc., 83 F.3d 610 (3d. Cir. 1995) (remanding with directions to decertify class and vacate injunction; intra - class conflicts precluded class from meeting adequacy of representation requirement), cert granted sub nom, Amchem Products Inc. v. Windsor, 117 S. Ct. 379 (1996).]
As a matter of public policy, the Working Group recommends that a plan proponent be permitted to treat mass future claimants in bankruptcy only if the plan proponent provided the requisite notice, the adequacy of which could be determined by the court, and if the mass future claimants were represented in the plan negotiation process to help ensure that the plan provides reasonably sufficient resources to fund the payment of mass future claims. A legal representative is essential to represent the interests of classes of holders who were not identified specifically during the bankruptcy proceedings. [ FN: The use of mass future claims representatives has become more readily accepted in the reorganization context, seeIn re Eagle-Picher Indus. Inc., 203 B.R. 256, 261 (S.D. Ohio 1996), notwithstanding some reluctance to permit the use of representatives or guardians ad litem in early asbestos cases. However, without statutory guidance, courts may be less inclined to assign representatives for future claimants in liquidation cases. See Locks v. U.S. Trustee, 157 B.R. 89 (W.D. Pa. 1993) (goals of liquidation did not necessitate representative), cited in Barbara J. Houser, David Ellerbe, Mark S. Farha, Sharon G. Ward, "Mass Torts and Other Future Claims, " Prepared for American Law Institute- American Bar Association Meeting, May 8-10, 1997. Cf.In re Forty-Eight Insulations Inc., 58 B.R. 476 (Bankr. N.D. Ill. 1986) (appointing future claims representative to prevent inequitable distribution to similarly situated creditors).] Each class of mass future claimholders would be entitled to its own representative, as the interests of the classes of mass future claims can be adverse to one another.
A party in interest may petition the court for the appointment of a mass future claims representative. When a plan includes classes of mass future claims, the bankruptcy court shall order the appointment of a representative for each class of holders of mass future claims. A mass future claims representative shall serve until further order of the Bankruptcy Court.
The representative shall have the exclusive power to file a claim or claims on behalf of the class of mass future claims (and to determine whether or not to file a claim), to cast votes on behalf of the holders of mass future claims and to exercise all of the powers of a committee appointed pursuant to section 1102. However, a holder of a mass future claim may elect to represent his or her own interests and may opt out of being represented by the mass future claims representative.
Prior to confirmation of a plan of reorganization, the fees and expenses of a mass future claims representative and his or her agents shall be administrative expenses under section 503. Following the confirmation of a plan of reorganization, and for so long as holders of mass future claims may exist, any continuing fees and expenses of a mass future claims representative and his or her agents shall be an expense of the fund established for the compensation of mass future claims.
The representative may not hold or represent an interest adverse to the class.
Standard of Care for a Mass Future Claims Representative:
Alternative 1: A mass future claims representative shall serve as a fiduciary for the class of holders of future claims that he or she represents. The court may determine as part of its order terminating the appointment of a mass future claims representative that such representative has fulfilled his or her fiduciary duties and has no personal liability for any act or omission taken on behalf of the holders of mass future claims.
Alternative 2: A mass future claims representative shall serve as a fiduciary for the class of holders of future claims that he or she represents.
Alternative 3: A mass future claims representative shall have no personal liability for any act or omission taken in good faith on behalf of the representative's class.
Exculpation of the mass future claims representative shall not extend to criminal acts or the improper receipt of any personal benefit by a mass future claims representative. A mass future claims representative shall be subject to suit only in the district where the representative performed his or her services.
The Commission will need to choose a standard of care for the mass future claims representative. The standard of care should be chosen in light of the need to protect mass future claimants and to provide reasonable protection against suit for a representative who has fulfilled the duty to represent the mass future claimants. Without a clear standard of care, the threat of personal liability (or potential litigation over personal liability) might unduly discourage qualified individuals from acting in this capacity. Moreover, absent some sort of protection, the mass future claims representative may be chilled in negotiations with the debtor and other creditors to develop a method to compensate victims, fearing that any course chosen could impose significantpersonal liability.
The proposal offers three approaches to the standard of care to be used for judging the behavior of the future claims representative. The first uses the fiduciary standard of care, but also permits the bankruptcy court to make a determination about whether the representative has met that standard upon terminating the appointment of the representative. Such an order would not be entered until the representative had fulfilled all of his or her duties regarding the claimants and the trust. This would insulate the mass future claims representative from retroactive second guessing about the decisions made on behalf of the mass future claimants.
Under the second option, the representative would be a fiduciary, but the court would not make a ruling on the satisfaction of that standard upon termination of appointment. This option is predicated on the concern that representing inchoate claimholders presents opportunities for mischief, and thus such representative should be held to the highest standard of care. Because this alternative does not contain a date certain on which the representatives actions no longer will be revisited, a representative held to this standard may be more constrained in negotiating a consensual plan or arrangement with the debtor or other creditors.
The third alternative approach uses the standard of good faith, but it also does not authorize the bankruptcy judge to resolve the question of the fiduciary's execution of the standard; again, it leaves that judgment to a later day.
The Working Group repeatedly has requested input from the bankruptcy community on the appropriate standard of care; the Commission received the first and the third alternatives from practitioners who have experience with future claims representatives under current law.
Determination of the Claim
Whether mass future claims can be reasonably estimated is an essential consideration, especially in those cases where the amount of funds set aside for payment of mass future claims is based on the courts estimation of the value of the claims.
Section 502 should provide that the court may estimate mass future claims and also may determine the amount of mass future claims prior to confirmation of a plan for purposes of distribution as well as allowance and voting. In addition, 28 U.S.C. § 157(b)(2)(B) should specify that core proceedings include the estimation or determination of the amount of mass future claims.
This amendment would empower the court to make a determination for purposes of allowance, voting, and distribution, which would inject certainty into the process for debtors and creditors alike. By expressly authorizing courts to determine mass future claims for purposes of distribution, this proposal would circumvent some of the confusion over the meaning of"estimation" in the context of contingent or unliquidated claims. [ FN: Cf.In re Poole Funeral Chapel Inc., 63 B.R. 527 (Bankr. N.D. Ala. 1986) (estimation dictates distribution),In re Baldwin-United Corp., 57 B.R. 751 (S.D. Oh. 1985) (estimation establishes cap, not floor, on distribution), andIn re MCorp. Financial Inc., 137 B.R. 219 (Bankr. S.D. Tex. 1992) (distribution not limited by estimation). See alsoIn re Eagle-Picher Industries Inc., 189 B.R. 681, 683 (Bankr. S.D. Ohio 1995) ( "it is ‘contingent or unliquidated claims, the value of which we are estimating. This is to be distinguished from estimating the value which claimants might take in satisfaction of their claims through some bankruptcy mechanism such as a trust "). The proposed provision is not intended to disturb current law governing estimation of contingent or unliquidated claims.] However, this proposal would not require courts to make binding determinations in all cases, as there may be circumstances where such determination should be deferred. The procedures should be sufficiently flexible to permit the use of estimations or determinations from other fora or the use of special masters to help estimate or determine the amount of mass future claims. The notion that courts can determine mass future claims for purposes of distribution has been strongly endorsed by many who have commented on the Commissions work in this area. [ FN: See, e.g., Memorandum from Stephen H. Case, dated December 3, 1996 Re: Comments on 11/26 Future Claims Memo (on file with National Bankruptcy Review Commission) ( "what is needed, may I submit, is a clear statement, not using the weasel word "estimation, " that the provisions in the plan providing for distributions to future claimants are final and binding and not subject to being reopened "); Letter from Prof. Barry E. Adler, dated February 24, 1997, at 4 (on file with National Bankruptcy Review Commission) (suggesting that bankruptcy court should be empowered to make binding determinations).] Such certainty is necessary in some situations where the value of the claims is a necessary component of adequately funding a trust. However, Commissioner Jones has expressed some reservations about permitting courts to make binding determinations of the amount of mass future claims.
The accuracy of this process is an important component to fair treatment of mass future claimants. In discussing procedures of claims estimation throughout the process of developing this recommendation, parties have directed much attention to the underestimation of claims in one of the earliest asbestos bankruptcy cases, the Johns-Manville case. This case ultimately involved multiple and unanticipated types of mass future claims. The Johns-Manville trust also faced other problems that affected its adequacy, such as parties "jumping the queue" and proceeding to litigation, group settlements to avoid litigation, and efforts to force the trust to litigate on several fronts at once. These problems undermined the ability of the trust to devote its resources to equitable compensation of asbestos claimants. Parties in other cases seem to have learned some of the lessons to be gleaned from the problems with the Johns-Manville trust, for most trusts in cases involving mass future claims have been able to make timely distributions without difficulty, and the A.H. Robins trust was funded in excess of original projections and was able to provide a second distribution to claimants.
Some parties have expressed concern that not requiring the court to estimate or determine claims in all cases provides too much latitude to treat and discharge more speculative claims. Although it would be necessary in most cases, not requiring estimation or determination in all cases merely is intended to promote efficiency and economy in appropriate circumstances; if all parties, including the future claims representative, consent to a plan of reorganization or anarrangement in a liquidation, estimation or determination during the pendency of the bankruptcy case might invoke unnecessary cost and expense. In addition, many creative mechanisms that have been proposed for structuring a trust [ FN: See, e.g., Mark J. Roe, "Bankruptcy and Mass Tort, " 84 Colum. L. Rev. 846, 864 (1984) (discussing methods such as administering trust like variable annuity). Professor Barry Adler also has suggested a trust organized by shares, with claimholders owning shares in trust based on the magnitude of their injuries.] may adequately compensate victims without requiring determination in the course of the bankruptcy proceeding.
Some courts have used channeling injunctions to bring insurance proceeds to the estate to distribute to beneficiaries, [ FN: See, e.g.,In re Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988);In re A.H. Robins, 880 F.2d 694 (4th Cir.), cert. denied , 493 U.S. 959 1989).] without the express statutory authority to do so. The 1994 asbestos amendments specifically provided for channeling injunctions, but only in that narrow class of cases. Channeling injunctions serve an appropriate, useful, and beneficial role in the equitable treatment of mass future claimants. For purposes of dealing with mass future claims, the Bankruptcy Code should provide that the court is empowered to use this valuable tool.
Section 524 should authorize courts to issue channeling injunctions
In appropriate cases, courts would have the jurisdiction and the authority to issue channeling injunctions that would protect the reorganized debtor from mass future claims that have been recognized and treated in the plan through the use of a mass future claims representative. The rights of these mass future claimholders would be directed for payment to a reasonably funded pool of resources.
3. Plan Confirmation and Discharge
The proposal deliberately does not prescribe the particular form for a plan involving mass future claims. For example, a plan could provide that the debtor will make future contributions or enable the trust to seek additional funding from the debtor; likewise, a plan might provide that the excess in an over-funded trust would be returned to the debtor. Other approaches, such as purchasing insurance policies in favor of mass future claimants, may be superior in some cases. [ FN: See Mark J. Roe, "Bankruptcy and Mass Tort, " 84 Colum. L. Rev. 846, 881 (1984) (discussing how otherwise unaffordable insurance policies become conceivable through mass tort bankruptcy).] In negotiating with the mass future claims representative and other parties, debtors may find lower-cost, creative alternatives to deal with mass future claims. Nothing requires ordinary trusts, in connection with channeling injunctions, to be the sole mechanism of directing compensation to mass future claimants.
Because a mass future claim would be subset of claim, an amendment to authorize the discharge of a mass future claim is not required. It may be appropriate, however, to recommend the repeal of section 524(g) to eliminate any confusion over whether special steps are necessary to discharge a mass future claim and to avoid a dual track treatment of future liabilities. This proposal also does not alter any of the otherwise applicable standards of confirmation, including the requirement that the plan be feasible and meet the best interest of creditors test.
In addition, nothing in this section discharges a debtors obligation on a newly incurred, postpetition liability. In the same way that any debtor has a duty to abide by all laws and regulations, the debtor dealing with mass future claims would be subject to the same requirements. If, for example, a manufacturer has a duty to warn consumers when it learned of certain kinds of defects and the duty to warn arose or continued postpetition, then the debtor would be required to meet those postpetition obligations. The mass future claims provision deals only with liability for prepetition acts or omissions of the debtor. It does not create immunity from postpetition liabilities.
In the context of reorganization, the discharge of mass future claims would benefit present creditors to the extent that the business could attract new capital and the going concern value of the business could be preserved. Mass future claimants also would benefit from the segregation of assets on their behalf, as otherwise the assets of the business could be exhausted long before they would be entitled to collect.
4. Successor Liability
In corporate law, the transfer of assets from one entity to another generally is not accompanied by the liabilities of the transferor. This proposal recognizes this concept with respect to mass future claims that have been represented and discharged and for whom the debtor has made provisions for treatment.
Sections 363 and 1123 should provide that the trustee may dispose of property free and clear of mass future claims when the plan proponent has satisfied the requirements for treating mass future claims. Upon approving the sale, the court could issue, and later enforce, an injunction that would enjoin holders from suing a successor/good faith purchaser.
Under this recommendation, holders of mass future claims would receive consistent treatment regardless of whether the debtor reorganized, liquidated, and/or sold substantial assets. Parties should have the flexibility to use all the present tools of reorganization and liquidation, including sales free and clear, and mass future claimants should have the same protection in all cases. Freeing the productive assets of the business from the uncertainty of mass future claimants will encourage buyers to offer a better price; in so doing, more assets would be available to fund a greater return for present claimants and holders of mass future claims.
However, a debtor could not sell off the major assets of the business in a sale and cut offmass future claimants access to the value of the assets unless the debtor satisfied the requirements for treating mass future claims. Without the appointment of a mass future claims representative, for example, the successor would not be protected from liability for mass future claims. A buyer would receive injunctive protection from successor liability for claims of mass future claimants that the debtor/seller had treated in the bankruptcy. Because entering a free and clear order would entail a finding that the debtor satisfied the requisite standards for treating mass future claims, the injunction would ensure that the successor is protected from certain suits when insulation from liability had been factored into the purchase price. This procedure would avoid a situation in which a court must decline to enforce its own free and clear sale order because mass future claimants did not receive treatment under the plan. [ FN: CfIn re Fairchild Aircraft Corp., 184 F.2d 910 (Bankr. W.D. Tex. 1995) (court declining to enforce prior free and clear sale order because claimants were not recognized and treated in bankruptcy case). See also Zerand- Bernal Group Inc. v. Cox, 23 F.3d 159 (7th Cir. 1994) (no "related to " jurisdiction to enjoin suit against successor for post-sale injuries, notwithstanding language in plan providing that court would enforce terms of sale agreement).] The fact that the bankruptcy court would be empowered to enforce this order does not mean that the order could not be enforced by other courts as well, especially if the issue arose long after plan consummation or closure of the bankruptcy case.
By enabling debtors to sell assets free and clear under the circumstances set forth in this
proposal, the Code would give parties the flexibility to choose the form that will maximize the
assets of the debtor without empowering parties to act strategically to disadvantage one class of
claimants. This approach promotes the equitable treatment of similar creditors by ensuring that
holders of mass future claims would not receive preferential treatment over the debtors
other creditors by following assets on a successor liability theory.