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News Room

Working Paper on Mass Torts and Future Claims


Businesses that face an ever-increasing range of potential problems look more and more to the bankruptcy system for a systematic and equitable approach to handle massive liabilities. Recognizing and treating identifiable future claims in bankruptcy can prevent a debtor from collapsing as a consequence of one catastrophic event, which not only would adversely affect the labor force but would serve to deprive all claimants of the benefit of the company’s going concern value and future earning power. At the same time, drawing future claims into a collective procedure prevents similar tort creditors from receiving vastly different treatment solely on the basis of when their injuries become manifest.

Many people who work with the bankruptcy system believe that the chapter 11 structure offers an appropriate and necessary forum for a business to deal with massive liabilities and future claims. Yet, most practitioners and commentators have acknowledged that the Bankruptcy Code currently does not provide the full breadth of guidance and the specific tools for courts to deal consistently and adequately with future claims. Although Congress codified the availability of channeling injunctions for future claims in asbestos cases in the Bankruptcy Reform Act of 1994, [ FN: See 11 U.S.C. §524(g) - (h).] it did not address all of the corollary issues or provide instruction for other cases involving other types of liabilities. Courts have made vastly disparate determinations on fundamental questions that have significant impact on the rights of parties, such as what constitutes a claim in bankruptcy and when that claim arises. Courts also have taken varying positions on key procedural issues such as the use of channeling injunctions, claims representatives, and trusts to protect injured parties.

Although the Commission has not made any decisions regarding future claims, the discussions of the Commission’s Working Group of Mass Torts and Future Claims have identified some features that would be key to any proposal to deal with future claims in chapter 11. First, the definition of claim would have to be clarified to create a uniform understanding of what claims are sufficiently cognizable to be acknowledged, treated, and discharged in bankruptcy. Second, the Bankruptcy Code would have to provide for meaningful representation of future claimants in the bankruptcy case generally and in the plan negotiation process. Third, the courts would have to be given the power and the tools to discharge and channel away from the reorganized debtor those future claims that have been represented in the process and treated in the plan. Fourth, the Code would require conforming changes with regard to successor liability to ensure consistency in outcome regardless of the identity of the entity that owns certain assets post-confirmation.

I. Defining Future Claims

Using the current definition of "claim," which includes "unliquidated," "contingent," and "unmatured" liabilities, [ FN: See 11 U.S.C. §101(5).] some courts have allowed debtors that are dealing with mass tort or products liability to provide for and discharge future claims. Not all courts, however, will recognize a claim if a cause of action has not accrued under non-bankruptcy law. [ FN: See , e.g. , In re Frenville , 744 F.2d 332 (3d Cir. 1984).] This creates inequity among creditors and does not comport with the broad conception of "claim" promulgated by the Code. Even the courts that have permitted debtors to deal with and discharge future claims have worked without statutory line-drawing guidance and thus have allowed debtors vastly different degrees of latitude in bringing future claims into the process. In some cases courts might hold that remote and unanticipated claims based on the debtors’ pre-petition conduct are discharged even if there is no 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).] while in other instances debtors might not be able to reorganize their businesses because they cannot convince courts of their power to channel legitimate future claimants away from the business. [ FN: See Kathryn R. Heidt, "Products Liability, Mass Torts and Environmental Obligations in Bankruptcy: Suggestions for Reform, " 3 Am. Bankr. Inst. L. Rev. 117, 126 (1995).]

The Working Group on future claims tentatively has outlined an approach to dealing with future claims. The working hypothesis starts with notion that a future claim can be a cognizable claim in bankruptcy, under the following circumstances:

A definition of "future claim" should be added to the definition of "claim" in 11 U.S.C. § 101(5). "Future claim" should be defined as:

a right to payment or equitable relief, regardless of whether a cause of action has accrued under non-bankruptcy law or whether the identity of the claimant is known, that is created by one or more acts of the debtor if:

1) the act or acts on which liability would be imposed occurred before or at the time of the order for relief;

2) the act or acts on which the claim is based are sufficient to establish liability when injuries ultimately are manifested and have been identified with reasonable certainty;

3) the category or categories of entities that may be holders of future claims have been identified with reasonable certainty;

4) the claim(s) or class(es) of claims are reasonably capable of estimation, or no harm results to claimants from failure to estimate.

The definition of "claim" in section 101(5) should be amended to add a definition of "future claimholder," which is an entity holding a future claim.

Defining "future claims" in the statute would end the debate on whether future liabilities can be claims. This particular definition would circumscribe the conditions under which a debtor could deem a potential liability to be a future claim in a fashion that is consistent with the preexisting definition of claim and the spirit of the Bankruptcy Code generally. It would be clear that a debtor could deal with identifiable future claimants in a plan and discharge those claims, if the debtor meets the requisite standards that are delineated in the following pages.

II. Protecting the Interests of Future Claimants

The Working Group felt strongly that if a debtor intends to discharge inchoate claims, the claimants’ interests should be represented in the plan negotiation process and the plan should provide reasonably sufficient resources to fund the payment of future claims. Procedural due process requires that a claimant, 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). An inchoate claim, such as a future claim, may not be entitled to Constitutional protection under the Fifth Amendment because it is not a property interest. 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). 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.] The Code should delineate the steps that a debtor must take to satisfy concerns of due process and fairness. The requirements that could be built into the Code should not be interpreted to preclude other logistical methods that may be necessary to satisfy due process, such as publication notice.

Future Claims Representatives

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

Section 501 should be amended to permit the appointed representative(s) to file claims on behalf of future claimants.

Those who participated in the Working Group discussions agreed that the success andvalidity of the system would depend on whether future claimants had an advocate, and they strongly endorsed the use of future claims representatives in all cases to represent the interests of claimants who were not identified specifically during the bankruptcy proceedings.

These recommendations recognize that more than one representative might be necessary to represent multiple future claimant groups with competing interests. It may be inappropriate to sweep all future claimants into a class with a single representative if the nature of their injuries are quite dissimilar. Narrowly defining the constituency of a future claims representative is consistent with other related provisions.

Estimation

Section 502(c) provides for estimation of contingent or unliquidated claims. Although the section provides that this estimation is done for the purpose of allowance, the case law is divided on whether estimation provides a cap on the amount of claims [ FN: See , e.g. , In re Poole Funeral Chapel Inc. , 63 B.R. 527 (Bankr. N.D. Ala. 1986).] or whether it only provides a ballpark figure for voting but does not limit distribution. [ FN: See e.g. , In re Mcorp. Financial Inc. , 137 B.R. 219 (Bankr. S. D. Tex. 1992).] The latter interpretation can place a debtor in a precarious position, especially with respect to future claims, as the amount of funds set aside for payment of future claims necessarily is based on the estimation process.

Section 502(c) should be amended to provide that the estimation of future claims shall be made for purposes of distribution as well as allowance and voting.

Specific reference to future claims would ensure the application of this provision to such claims, and clarifying that estimation establishes a cap on distribution injects certainty into the process for debtors and creditors alike. Whether a potential future claim can be reasonably estimated is an essential element of the proposed definition of future claim. The Working Group has heard stories both of successes and failures in estimation procedures. Examples of failed estimation often have involved multiple and sometimes unanticipated types of future claims. More recent cases have had somewhat more success in developing a claims estimation process.

The definition of claim requires that the claims be "reasonably capable of estimation." Unidentified, unanticipated claims would ride through the bankruptcy process under this proposed structure. However, estimation procedures clearly are not foolproof, and in all likelihood the Working Group will continue to assess this issue.

Channeling Injunctions

Many courts have used channeling injunctions to bring insurance proceeds to the estate to distribute to the beneficiaries, but they have had no statutory authority to do so. Channeling injunctions have been recognized as serving a an appropriate, useful, and beneficial role in the equitable treatment of tort claimants. To deal with future claims, the Code should provide that the court is empowered to use this valuable tool.

Section 105 should be amended to authorize courts to issue channeling injunctions.

This addition 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, would be unfair to channel future claims away from the reorganized company unless the plan of reorganization made reasonable provisions for the payment of these claims.

III. Discharge

Assuming that the debtor has taken all required steps, the discharge of reasonably identifiable future claims would benefit most creditors. Again, the group of future liabilities eligible to be discharged would be delimited by the future claims definition and by other related provisions.

Section 1141 should be amended to clarify that confirmation binds future claimants, and that any further liability against the debtor that has been dealt with under the plan is discharged.

Again, it bears repeating that the claims subject to discharge are those that have been identified with reasonable certainty that were reasonably capable of estimation and were predicated by acts sufficient to establish liability when injuries ultimately are manifested. 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: In all likelihood, these recommendations would prevent the result reached in Texaco Inc. v. Sanders , 182 B.R. 937 (Bankr. S.D.N.Y. 1995), in which 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.]

IV. Successor Liability

Section 363 should be amended to include a provision to clarify that if notice, hearing and estimation requirements for dealing with future claimants have been met at the time of the sale, a good faith purchaser under sections 363 or 1123 may take free and clear of such future claims based on successor liability for pre-sale acts of the debtor.

This recommendation offers protection to both debtors and creditors. A buyer would not be able to insulate itself fully from successor liability, for a victim would not be left without redress if he did not have a claim in the bankruptcy case. At the same time, future claimants that are reasonably identifiable should not be able to receive preferential treatment over other claimants by going after assets on a successor liability theory when the assets have been sold, supposedly "free and clear," by the bankruptcy estate.

By freeing the productive assets of the business, such as manufacturing equipment, from the uncertainty of future products liability, a sale of the debtor business will yield a better price and fund a greater return for potential future claimants.

Summary of Key Features of

a Future Claims Proposal

·A definition of "future claim" would be added to the definition of "claim."

·A "future claim" is a claim that would be based on the debtor’s pre-bankruptcy acts that would give rise to liability, but for which the actual injured parties have not been discovered yet.

·The acts on which liability is based and the category of parties that may be future claim holders would have to be identified with reasonable certainty.

·The claims would have to be reasonably capable of estimation.

·If a debtor plans to deal with future claimants in a plan of reorganization, the court would have to appoint a future claims representative for a class of future claims.

·If the plan meets all of the appropriate qualifications, including adequate notice and the use of a representative, a future claimant’s prospective recovery would be limited to the amount estimated for allowance of that claim, likely to be received through a trust. Channeling injunctions would be specifically authorized.

·A good faith purchaser under 11 U.S.C. §§ 363 or 1123 would take free and clear of future claims based on successor liability for pre-sale acts of the debtor if the notice, hearing and estimation requirements for dealing with future claimants had been met at the time of the sale.

·A plan proponent would not be required to deal with future claims; such claims would be left to ride through the bankruptcy and would remain post-petition obligations of the debtor.

 

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