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Mass Torts and Mass Future Claims

When Congress enacted the asbestos amendments in the Bankruptcy Reform Act of 1994, it not only addressed the tremendous need for legislative guidance to ensure fair and equitable treatment to asbestos claimants in bankruptcy, but it recognized that the need for a mechanism to deal fairly and equitably with massive liabilities was not limited to the asbestos context. Congressional hearing statements and the legislative history invite consideration of whether the concepts inherent in the 1994 amendments should be extended legislatively to other areas. [ 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).] Although the Judiciary Committee clearly recognized that some courts already were dealing with mass claimants, it recognized the value of greater certitude regarding the validity of the mechanisms that these courts had implemented, which should be accomplished by explicit statutory provisions. Even when courts have confirmed plans that treat and discharge mass future claims, permitted the establishment of trusts, and issued channeling injunctions, the uncertainty surrounding the legality of channeling injunctions has adverse consequences that Congress has sought to resolve. [ 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).]

Consistent with Congress’ message, the asbestos amendments have not been interpreted to preclude the use of bankruptcy to deal with other types of liabilities. [ 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).] However, without a statutory framework in which to treat non-asbestos inchoate claims, some courts have expressed discomfort exercising the scope of powers necessary to handle these cases appropriately. [ FN: This uncertainty has been a continuing theme throughout the published caselaw. 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. See In 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 " ).]

At the December 1996 meeting of the National Bankruptcy Review Commission, the Commissioners agreed to work toward developing a specific recommendation for dealing with mass future claims in bankruptcy. This proposal represents the approach developed in the subsequent meetings.

1. The Definition of Mass Future Claims

Working without statutory line-drawing guidance, courts have allowed debtors vastly different degrees of latitude in bringing mass future claims into the process. [ FN: The types of tests that courts have used to determine whether a potential liability is a claim include the conduct test, see In re A.H. Robins Co. , 839 F.2d 198 (4th Cir.), cert. denied , 487 U.S. 1260 (1988), the prepetition or preconfirmation relationship test, see In re Piper Aircraft Corp. , 58 F.3d 1573 (11th Cir. 1995), and the accrued state law claim test, see In 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 believe that the current definition of claim, which includes "unliquidated," "contingent," and "unmatured" liabilities, [ FN: See 11 U.S.C. õ 101(5).] encompasses mass future claims and thus 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).] Other courts have permitted representation of future injured parties as "parties in interest" under section 1109 but not necessarily as holders of "claims." [ FN: See In 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).] Although potentially inconsistent with the notion that the definition of claim is to bebroadly construed, [ FN: See H.R. Rep. No. 595, 95th Cong., 2d Sess. 309 (1977) ( " all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case " ).] 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).] On the other end of the spectrum, once they have found that a claim exists, some courts then have concluded that the claim can be discharged - - even if remote and unanticipated -- without any identification, representation, or treatment in the plan. [See , e.g. , Texaco Inc. v. Sanders , 182 B.R. 937 (Bankr. S.D.N.Y. 1995) (holding that unnoticed and untreated liabilities of debtor were claims that were discharged in bankruptcy).]

The current broad definition of "claim" does not distinguish between contingent mass tort claims that are likely to give rise to substantial demands in the future and other types of contingent claims. Without modifying the definition of "claim," the Working Group proposes to add a definition of "mass future claim" that would clarify when bankruptcy may deal with mass liabilities. This would provide a much-needed, more uniform conception of what claims would be of sufficient magnitude to justify discharging and channeling them away from the assets of a reorganized debtor in bankruptcy or for distribution in a liquidation. Recognizing this group of claimants in a more structured fashion also ensures that parties with such claims will be represented and will receive compensation. In both reorganizations and liquidations, the objective is to enhance the likelihood that there will be some compensation for parties who, because of the size of their claims in the aggregate and the delays they face in collecting, might otherwise end up with nothing. The constraints and limitations in the definition are intended to provide a gatekeeping function to limit the ability of debtors to channel claims away from the assets of the reorganized debtor under circumstances where those claims are unknown, insubstantial or so speculative that they are not reasonably capable of estimation. 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 bankruptcy, and most cases would not involve provisions for unmanifested claims.

The working hypothesis for dealing systematically with mass future claims logically begins with the notion that a mass future claim can be a cognizable claim in bankruptcy under the following circumstances:

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 or no harm results from failure to estimate.

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.

Nothing should curtail or in any other way affect the meaning of "claim," except to add a subset of claims known as "mass future claims." The definition of all other claims, including "contingent," "unliquidated" and "unmatured," would be unaffected by this provision. Nor does anything in the definition of mass future claim affect the ability of the government to pursue police and regulatory functions as currently authorized under section 362(b).

Defining mass future claims in the statute would resolve the current debate over the kinds of future liabilities that can be resolved as claims in bankruptcy. This definition would circumscribe the conditions under which a plan proponent could deem a potential liability to be a mass future claim. The definition is intended to limit the claims that would be eligible for treatment to those significant tort and contract liabilities that meet specified standards. It would be clear that a plan proponent could deal with the holders of mass future claims in a plan, if the plan met the requisite standards that are delineated here and in the following pages.

By making the definition of mass future claims a subset of the definition of claims, the provision would avoid the possibility of creating a lacuna between "claim" and "mass future claim." This approach also would avoid the gap created by the 1994 asbestos amendments, which did not define the scope of the injuries may give rise to a claim and thus create great uncertainty when trying to interpret them in the context of other Bankruptcy Code provisions. [ FN: 11 U.S.C. õ 524(g), (h).]

2. Protecting the Interests of Holders of Mass Future Claims

The Working Group concluded as a matter of public policy that it wished to consider bankruptcy treatment for future claimants only in circumstances in which appropriate notice efforts had been made and the claimants were adequately represented by a future claims representative. If a plan proponent intended to channel collection of inchoate claims away from the debtor business, the interests of the holders of such claims should be represented in the plan negotiation process and the plan should provide reasonably sufficient resources to fund the payment of mass future claims.

As a matter of fairness, the Bankruptcy Code should delineate the requisite conditions for treatment of mass future claimants, even though an inchoate claim, such as a future claim, may not be entitled to Constitutional protection under the Fifth Amendment because it may not be a property interest. [ FN: 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).] In any event, procedural due process requires only that a claim holder, or representative thereof, receive notice and the opportunity to be heard insofar as practicable. [ FN: See Mullane v. Central Hanover Bank and Trust Co. , 339 U.S. 313 (1950).] This proposal is predicated on this standard. Outside bankruptcy, in the context of class actions, "[i]t is well settled that a unitary adjudication of a limited fund binds future, contingent, and unknown claimants who, by definition, could not give consent to jurisdiction." [ FN: Flanigan v. Ahearn (In re Asbestos Litigation) , 90 F.3d 963 (5th Cir. 1996), citing Mullane , 339 U.S. 306. " Of course, many practices are common and desirable that are not constitutionally required. Yet, as the Supreme Court loves to say, ‘ 'due process' is a flexible concept. ’ [citation omitted] In any specific context, the process that is due depends on a variety of factors; typically, courts balance the marginal gains from a procedural safeguard against its societal cost. In the mass tort context, the value of the right to opt out and obtain one's day in court may seem both illusory, in a world where individual trial attorneys deal not in cases, but in inventories, and expensive, in terms of its impact on the federal docket. " Flanigan v. Ahearn , 90 F.3d at 1449.]

It is worth noting that bankruptcy may be more protective of mass tort claimant’s rights than class actions. [ 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). See also Flanigan v. Ahearn , 90 F.3d at 1422-23 ( " The attractions of the class action over a bankruptcy reorganization to the defendant are obvious: (1) defendants can reach a settlement before the action is filed, whereas in bankruptcy there will typically be uncertainty as of the filing date as to what percentage of the firm's value must be given to the settlement trust set up to benefit victims; (2) the debtor corporation can escape the absolute priority rule and special class voting rules of bankruptcy; (3) bankruptcy courts may reopen the proceeding and demand additional allocations from the reorganized corporation when the trust fund approaches insolvency; and (4) the legal status of future claims in bankruptcy remains unresolved, with some decisions implying that some future claims cannot be discharged by the bankruptcy court " ).] Some believe that the fundamental rules in bankruptcy, such as the absolute priority rule, provide greater safeguards of the interests of tort claimants, especially mass futureclaimants, than do class actions under Rule 23 of the Federal Rules of Civil Procedure. [ FN: Coffee, supra note 16, at 1383. Some litigants argue, although usually unsuccessfully, that a limited fund class action settlement may constitute an impermissible attempt to circumvent bankruptcy and the absolute priority rule. See , e.g. , Flanigan v. Ahearn , 90 F.3d at 982.] This is especially true given the possibility of certifying a limited fund non-opt out class. [ FN: 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).] Moreover, in upholding the settlement of a non-opt-out class action, at least one circuit court has held that the use of one class counsel for both present and future claimants in a non-opt out class action did not constitute a conflict of interest. [ FN: Flanigan v. Ahearn , 90 F.3d at 982. In discussing the protection of future claimants, the court noted that in bankruptcy, the treatment of " future tort claimants [has] left them in an uncertain position that falls short of full ‘ creditor ’ status. " Id. at 985.] In addition to the safeguards that already exist in the bankruptcy system, the proposal presented here would provide enhanced protection when a debtor sought to deal with and discharge massive liabilities.

Mass Future Claims Representatives

The bankruptcy court shall order the appointment of a representative for each class of holders of mass future claims. This representative shall have the power to file claims on behalf of the class of mass future claims and to cast votes on behalf of the holders of mass future claims.

The court has the discretion to determine whether the representative(s) will have the powers, rights, obligations, and duties of a committee under section 1102.

A mass future claims representative shall be subject to suit only in the court where the representative performed his or her services. Such representative shall have no personal liability for any act or omission taken in good faith on behalf of the holder of the mass future claim. This exculpation does not extend to criminal acts or the improper receipt of any personal benefit by a mass future claims representative.

A holder of a mass future claim may elect during the pendency of a bankruptcy to represent his or her own interests and may opt out of being represented by the mass future claims representative.

Those who participated in the Working Group’s discussions agreed that the success and validity of the system would depend on whether holders of mass future claims had an advocate. They strongly endorsed the use of mass future claims representatives in all cases to represent theinterests 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, see In 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 the 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) (different 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 of assets to similarly situated creditors).]

This proposal recognizes that each group of holders of mass future claims might need its own representative. It might be inappropriate to sweep all holders of mass future claims into a class with a single representative if the nature of their injuries were quite dissimilar or if they had competing interests. Narrowly defining the constituency of a mass future claims representative is consistent with the intent of related provisions that require adequate treatment as a prerequisite to discharge.

An exculpation clause would provide reasonable protection against suit for a representative who has fulfilled the duty to represent the mass future claimants. Otherwise, the threat of personal liability might unduly discourage qualified individuals from acting in this capacity. An unnecessarily high standard for judging the behavior of the future claims representative might also have the effect of paralyzing a representative from settling any case or working with the debtor and other creditors to develop a method to compensate victims for fear that any course chosen could impose personal liability. At the same time, the standard of care applicable to a mass future claims representative must have sufficient substance to offer meaningful guidance. Mindful of these goals, the Working Group has tentatively settled on "good faith" as the applicable standard of care. In developing the standard of care applicable to such a representative, there was concern that a state law fiduciary standard would be too high, since a fiduciary often knows more about the needs of his or her beneficiaries than might be possible for someone representing the holders of inchoate, mass future claims. The Working Group chose the good faith standard to indicate that a mass future claims representatives should be held to a duty that will ensure fair treatment of mass future claimants, taking into account the circumstances of the case.

Determination of the Claim

The Bankruptcy Code presently authorizes the estimation of contingent or unliquidated claims in section 502(c). Although section 502(c) provides that this estimation is for the purpose of "allowance," the case law is divided on whether estimation provides a determination of the amount needed for such claims or whether it provides only a ballpark figure for voting and placesno limit on distribution. [ 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, of distribution), andIn re MCorp. Financial Inc. , 137 B.R. 219 (Bankr. S.D. Tex. 1992) (distribution not limited by estimation). See also In 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 latter interpretation can place a debtor in a precarious position, as the amount of funds set aside for payment of mass future claims necessarily is based on the estimation process. This is a problem with all claims, but it is exacerbated in the circumstances of mass future claims. The Working Group recommends avoiding this ambiguity in cases involving mass future claims because it is essential to the structure of dealing with such claims, but it realizes that leaving the conflicting caselaw undisturbed regarding the treatment of present claims may be problematic.

Section 502(b) should be amended to provide that the court may determine contingent, unliquidated, or mass future claims prior to confirmation of a plan for purposes of distribution as well as allowance and voting and to permit determination for a class of claimants as well as for individuals within the class. In addition, 28 U.S.C. § 157(b)(2)(B) should specify that the determination of the amount of mass future claims would be included in core jurisdiction.

Clarifying that estimation establishes the amount available for distribution injects certainty into the process for debtors and creditors alike. Whether a potential mass future claim can be reasonably estimated is an essential element of the proposed definition of mass future claim. Courts should be empowered, although not required, to make binding determinations, as the details of a plan often are fact-specific.

The estimation procedures are written to give the court as much flexibility as possible in determining claims, including the use of estimations from other fora. Mass future claims should, of course, be estimated based on their present value.

The Working Group has heard about both successes and failures in estimation procedures, the latter of which can lead to grossly inadequate trust assets. Examples of failed estimation often have involved multiple and sometimes unanticipated types of mass future claims. [ FN: Although the Manville trust is often cited as an example of mistaken estimation, the courts and various commentators have suggested that the reason the trust ran out of money was the result of high transaction costs, " jumping the queue " and proceeding to litigation, group settlements to avoid litigation, and forcing the trust to litigate on several fronts at once. These problems undermined the ability of the trust to put its resources into victim compensation.] More recent cases, however, have produced more accurate claims estimations. [ FN: For example, the A.H. Robins trust was funded in excess of original projections so that it was able to make a second distribution to claimants.] The proposed definition of mass future claim would require that the claims be "reasonably capable of determination." Unidentified, unanticipated, speculative claims would ride through the bankruptcy process under this proposed structure.

Formal determination of claims may not be required in all cases. The mass future claims representative may conclude, for example, that if a trust is funded with all the stock of the debtor, then formal estimation would waste both time and resources.

Channeling Injunctions

Some courts have used channeling injunctions to bring insurance proceeds to the estate to distribute to the 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).] but they have had no express statutory authority to do so. The 1994 asbestos amendments specifically provided for channeling injunctions, but only in that narrow class of cases. [ FN: 11 U.S.C. § 524(g)(1)(A).] Channeling injunctions serve an appropriate, useful, and beneficial role in the equitable treatment of tort claimants. For purposes of dealing with mass torts and mass future claims, the Code should provide that the court is empowered to use this valuable tool.

Section 524 should be amended to authorize courts to issue channeling injunctions.

This addition to the Code would establish that in appropriate cases, courts could issue channeling injunctions that would protect the reorganized debtor from claims that have been recognized and treated in the plan through the use of a claims representative, and would direct those rights to payment to a reasonably funded pool of resources. Of course, it would be inappropriate to channel mass future claims away from the reorganized company unless the plan of reorganization made reasonable provisions for the payment of these claims. [ FN: To streamline proceedings and provide flexibility, it might be appropriate to recommend that the Rules Committee amend Fed.R.Bankr.P.7001 as well to provide that channeling injunctions are available without requiring an adversary proceeding, since Rule 7001(7) currently provides that adversary proceedings include those to obtain injunctions or other equitable relief.] Courts would have jurisdiction to enforce channeling injunctions.

Channeling injunctions are frequently used in connection with funding a trust to deal with mass future claimants. While this provision is designed to permit such approaches, nothing here requires that trusts would be the sole method of compensating mass future claimants. Other approaches, such as insurance policies in favor of mass future claimants, may be superior in some cases. Moreover, parties may find lower-cost, creative alternatives to deal with mass future claims. This proposal is designed to provide the structure for such initiatives.

3. Discharge

If the plan proponent had taken all required steps, the discharge of reasonably identifiable 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 who might not collect until long after all the assets of a business had been exhausted would also benefit from the segregation of assets on their behalf that could occur as part of a plan of reorganization. The group of future liabilities eligible to be discharged would be limited by the restrictions in the definition of mass future claims and by other related provisions.

Section 1141 should be amended to clarify that confirmation binds holders of mass future claims that have been filed under the plan, and that liability of the debtor is discharged.

Again, it bears repeating that the claims subject to discharge are those that meet the applicable standards, e.g., if a claim is filed (or deemed filed) and "dealt with under the plan." Any latent claims of victims that result from the debtor’s prepetition actions that do not fit this category, and have not been treated in the plan, will ride through the bankruptcy to the reorganized debtor or to a successor entity. [ FN: The results reached in Texaco Inc. v. Sanders , 182 B.R. 937 (Bankr. S.D.N.Y. 1995), could not occur under the mass future claims provision. In Sanders , the court held that private environmental damage claims had been discharged by Texaco ’ s bankruptcy even though claimants were not represented in the bankruptcy and no provisions were made for their types of claims.]

Nothing in this section discharges the debtor’s obligation on a newly incurred, postpetition liability. In the same way that any debtor post-filing has a current duty to meet its postpetition obligations and 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 had 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 is designed to deal only with liability for prepetition acts or omissions of the debtor, not to create immunity from postpetition liabilities.

IV. Successor Liability

The treatment of mass future claimants should not depend on the form of reorganization or liquidation chosen by the parties. Instead, parties should have the flexibility to use all the tools of reorganization and liquidation, including sales free and clear, and mass future claimants should have the same protection in all cases.

Sections 363 and 1123 should be amended to clarify that a trustee may dispose of property free and clear of mass future claims that might arise if the requirements for dealingwith mass future claims in a plan of reorganization had been met. An automatic injunction would enjoin holders from suing a successor/good faith purchaser, which the bankruptcy court would be authorized to enforce.

This recommendation offers protection to both debtors and creditors. It would not fully insulate a buyer; a tort victim who did not have a claim in the bankruptcy case would not be left without redress. At the same time, holders of mass future claims that are reasonably identifiable should not be able to receive preferential treatment over other holders by following assets on a successor liability theory when the terms of the sale of the assets expressly provided for a sale free and clear of past liability. The channeling injunction would ensure that the successor is protected from certain suits after the insulation from this liability has been built into the successor’s purchase price. Before a court approved a sale free and clear of mass future claims, the plan proponents would have to satisfy the standards for treatment of such claims, thus avoiding a situation where a court must decline to enforce its own free and clear order because future claimants did not receive treatment under the plan. [ FN: Cf. In re Fairchild Aircraft Corp. , 1854 B.R. 910 (Bankr. W.D. Tex. 1995). 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).]

Freeing the productive assets of the business from the uncertainty of future products liability will encourage buyers to offer a better price, which will provide more assets to fund a greater return for present claimants and potential holders of mass future claims.


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