Re: Future Claims and Mass Torts in Bankruptcy
National Bankruptcy Review Commission
One Columbus Circle N.E., Suite 5-130 ¶ Washington, D.C.
20544 ¶ 202-273-1813 ¶ Fax: 202-273-1048 ¶ e-mail
Web Site: www.nbrc.gov
To: National Bankruptcy Review Commission
From: Elizabeth Warren, Reporter, NBRC
Melissa Jacoby, Staff Attorney, NBRC
Date: March 24, 1997
Re: Future Claims and Mass Torts in Bankruptcy
Many businesses have looked to the bankruptcy system for a systematic and equitable
structure to deal with mass torts. Recognizing and treating current and identifiable future tort
claims in bankruptcy can prevent a debtor from collapsing as a consequence of a catastrophic
event, mass injury linked to a product, or a similar calamity. In these cases, collapse would
adversely affect the labor force and other businesses that depend on the company, and also would
deprive all claimants of the benefit of the companys going concern value and future
earning power. In liquidation cases, being able to bring future claimants into the process permits
more equitable apportionment of assets among all those who have been affected by a company's
actions. Giving courts better tools to deal with cases involving significant tort liability offers the
prospect of greater certainty, both as to outcomes and recoveries for tort claimants and general
In its extended deliberations on this topic, the National Bankruptcy Review Commission has
profited from thoughtful discussions and helpful comments from a number of people. In
particular, Barry Adler, Frederick Baron, Donald Bernstein, Hon. David Coar, Jeffrey Davis,
David Epstein, Malcolm Gaynor, Leonard Goldberger, Robert Greenfield, Barbara Houser, Ralph
Mabey, Hon. Robert Mark, Michael Reed, Hon. Jack Schmetterer, Alan Tenenbaum, George
Triester, Jeffrey Warren, Stephen Case and Lawrence King have been generous in contributing
their time to this proposal.
The Commission has decided to make a comprehensive recommendation to Congress to deal
with mass torts and future claims in bankruptcy. A working draft of that proposal is attached.
The Commission invites your comments, which can be sent by regular mail or by e-mail to the
addresses listed above. The Commission plans to consider this topic further at the morning
session of its April 18 meeting.
This is a draft proposal. The Commission has not voted on any of the specific items listed
here, and both the scope and the details of the proposal could change significantly in future
iterations. This draft is the product of lengthy discussions, and one for which the Commission
actively solicits feedback at this juncture in its deliberations.
The Working Group calls your attention to the definition of future claims. The provision has
been redrafted to make it less repetitive and the provision from the asbestos amendments has been
added to limit eligibility for future claims treatment to "big problems." The group
would be grateful for comments on the approach used here and whether a different approach
would be superior.
The Working Group also draws your attention to the question of the standard of care
applicable to activities of the claims representative. There was a lengthy discussion on this point
at the January meeting. The goal is to provide adequate assurance that the representative will not
merely be a lackey of the plan proponents who want the claims washed away. At the same time,
it is important that standards not be so stringent that no one could serve or that the representative
would lack the requisite flexibility to craft creative solutions. The Working Group also solicits
comments about the appropriate mechanism for a court to determine that a proposed class meets
the eligibility requirements. Any thoughts on the standard and the triggering mechanism would be
Finally, the Working Group notes that this proposal contains no specific provision for a
mechanism to assure adequate funding is made available. The Working Group invites comments
on whether it should be left to the parties, including the future claims representative, to negotiate
about the adequacy of funding, or whether the statute should contain a standard against which the
court makes an independent judgment regarding funding.
The Working Group is grateful for the many thoughtful contributions people have made to
Summary of Key Features of
a Future Claims Proposal
A definition of "future claim" would be added to the definition of
"claim." A number of constraints are embedded in the concept of "future
claim," including the requirement that such claim be based on the debtors
pre-bankruptcy acts or omissions that may give rise to liability although the actual injured parties
have not been discovered by the time of filing. The claims would have to be reasonably
capable of estimation. A debtor would have to be subject to demands for payments for the
injuries and likely to be subject to future demands for payment on similar grounds.
Whenever a debtor intended to deal with future claims, there would have to be a future claims
representative for the class and adequate notice would have to be provided to the class.
If all applicable constraints were satisfied, the prospective recovery for a holder of a future
claim would be limited to the amount estimated for allowance of that claim, most likely to be
distributed through a trust or an insurance fund. Channeling injunctions would be specifically
A chapter 7 liquidation might include provisions for holders of future claims, if the situation
satisfied the same constraints as those imposed on chapter 11 plan proponents.
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 holders of future claims had been met at the
time of the sale. The bankruptcy court would be authorized to enjoin suits against a successor
brought by holders of future claims whose claims had been discharged.
Dealing with future claims would be permitted but not mandatory. Even if there were
potential liabilities that satisfied the definition of future claim, a chapter 11 plan proponent might
propose a plan that did not deal with those future claims, and they would ride through the
bankruptcy and would remain postpetition obligations of the debtor. Provision for future
claimants would not be necessary in all chapter 7 liquidations. Most cases would liquidate
without future claims provisions. In some cases, however, where it was likely that a substantial
class of future claimants would exist, a trustee might have to provide for those claimants as well
as for the present claimants.
National Bankruptcy Review Commission
One Columbus Circle NE, Suite 5-130 ¶ Washington, D.C. 20544 ¶
202-273-1813 ¶ Fax: 202-273-1048 ¶ firstname.lastname@example.org;
Outline of Future Claims Proposal
March 12, 1997
At the December 1996 meeting of the National Bankruptcy Review Commission, the
Commissioners decided to work toward developing a specific recommendation for dealing with
future claims in bankruptcy. The Mass Torts and Future Claims Working Group settled on some
basic principles in their approach. The definition of "claim" would have to be
clarified to create a uniform understanding of what claims would be sufficiently cognizable to be
acknowledged, treated, and discharged in bankruptcy. The future claims provision would be
designed to deal with estimable claims that threatened the economic survival of the business, not
to provide generic discharges of currently unknown and speculative future liabilities. The
Bankruptcy Code would have to provide for meaningful representation of holders of future claims
in the bankruptcy case generally and in the plan negotiation process. Any proposal would have to
strike a balance between the need for adequate compensation to victims and permitting an
otherwise viable business to continue operations. The Working Group concluded that, of the
currently available choices for dealing with mass torts, the bankruptcy process offers clear
This outline briefly addresses each of these features.
I. Defining Future Claims
Using the current definition of "claim," which includes
"unliquidated," "contingent," and "unmatured" liabilities,
See 11 U.S.C. §101(5).] some courts have allowed debtors dealing
with mass tort or products
liability to provide for and discharge future claims. Not all courts, however, 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
Bankruptcy Codes broad conception of "claim." 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 have held that remote and
unanticipated claims based on the debtors prepetition conduct can be discharged even if
there isno 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
a debtor has not been
able to reorganize its businesses because it was not able to convince a court that the court had the
power to channel legitimate holders of future claims 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 definition is designed to permit a reorganization to deal with liabilities
that threaten not only the future of the company but that also threaten future compensation for
those injured by the company. It is also designed to permit parties with unmatured claims to be
represented in a liquidation. In both cases, the objective of inclusion is to provide some
compensation for parties who might otherwise end up with nothing. The constraints and
limitations in the definition of "future claim" would provide the gatekeeping function
designed to prevent debtors from taking a broad and generic discharge in bankruptcy, including a
discharge of currently unknown and speculative future liabilities based on past events. The
standards also would eliminate the possibility that a bankruptcy reorganization would become an
automatic liability "bath;" a plan could deal with future claims only if failure to deal
with those claims would make it unfeasible to reorganize the business. Due to the restrictions in
the definition of future claims, most cases, including liquidations, would not be burdened with
considerations about future claims.
The working hypothesis for dealing systematically with future claims logically begins with the
notion that a future claim can be a cognizable claim in bankruptcy, under the following
A definition of "future claim" should be added as a subset of
the definition of "claim" in 11 U.S.C. § 101(5).
"Future claim" should be defined as:
a right to payment or equitable relief 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 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 future claim," which would be an entity that holds a future claim.
Defining "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
future claim in a way that is consistent with the preexisting definition of claim and the spirit of the
Bankruptcy Code generally. The definition is intended to limit the claims that would be eligible
for treatment to those significant tort liabilities that meet specified standards. It would be clear
that a plan proponent could deal with identifiable holders of future claims in a plan and discharge
those claims, if the plan met the requisite standards that are delineated here and in the
In this draft, the definition of "future claims" is a subset of the definition of
claims. In so doing, the provision would avoid the possibility of creating a lacuna between
"claim" and "future claim." This approach also would avoid the problems
that were created by the Asbestos Amendments, which were part of the Bankruptcy Reform Act
of 1994. [ FN: 11 U.S.C. §524(g),
(h).] Because those amendments deal with injuries that may
become manifest in the future without defining which of those may give rise to a claim, they
create great uncertainty when the courts try to interpret them in the context of other provisions in
the Bankruptcy Code. [ FN: If Congress
adopted the types of recommendations that are contained
in this proposal, the Asbestos Amendments may be superfluous.]
II. Protecting the Interests of Holders of Future Claims
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 future
claims. Procedural due process requires 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). 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 Bankruptcy Code should delineate the steps that a
plan proponent would
be required to 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 might 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
holders of future claims. 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.
A 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 future
claim. This exculpation does not extend to criminal acts or the improper receipt of any
personal benefit by a future claims representative.
A holder of a 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 future
Those who participated in the Working Groups discussions agreed that the
success and validity of the system would depend on whether holders of future claims had an
advocate, and they strongly endorsed the use of future claims representatives in all cases to
represent the interests of classes of holders who were not identified specifically during the
This proposal recognizes that more than one representative might be necessary to represent
multiple groups of holders of future claims with competing interests. It might be inappropriate to
sweep all holders of future claims into a class with a single representative if the nature of their
injuries were quite dissimilar. Narrowly defining the constituency of a future claims representative
is consistent with the intent of related provisions that require adequate treatment as a prerequisite
An exculpation clause would provide reasonable protection against suit for a representative
who has fulfilled the duty to represent the future claimants. Otherwise, the threat of personal
liability might unduly discourage qualified individuals from acting in this capacity. At the same
time, the standard of care applicable to a future claims representative must have sufficient
substance to offer meaningful guidance. Mindful of these goals, the Working Group has not yet
settled on an applicable standard of care. For example, 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, future claims. On the other hand,
such representatives should be held to a duty that will ensure fair treatment of 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 places no limit on distribution. [
FN: Cf. In re Poole Funeral Chapel Inc. , 63 B.R.
527 (Bankr. N.D. Ala. 1986) with In re MCorp. Financial Inc. , 137 B.R. 219 (Bankr. S.
1992). See also In re Eagle-Picher Industries Inc. , 189 B.R. 681, 683 (Bankr. S.D. Ohio
( "it is ‘contingent or unliquidated claims, the value of which we are estimating. This is
distinguished from estimating the value which claimants might take in satisfaction of their claims
through some bankruptcy mechanism such as a trust ").] The latter
place a debtor in a precarious position, as the amount of funds set aside for payment of future
claims necessarily is based on the estimation process. This is a problem with all claims, but it is
exacerbated in the circumstances of a future claim. The Working Group recommends a change
for future claims because it is essential to the structure of dealing with such claims, but it realizes
that leaving the Code ambiguous regarding the treatment of present claims may be problematic.
The Working Group plans to consider this problem further.
Section 502(b) should be amended to provide that the court may determine
contingent, unliquidated, or 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
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 future claim can be
reasonably estimated is an essential element of the proposed definition of 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 estimation from other fora. 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 future claims. More recent cases
seem to have had more accurate claims estimation processes. The proposed definition of 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. However, estimation procedures clearly are not foolproof, and the
Working Group may continue to assess this issue.
Formal determination of claims may not be required in all cases. The 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.
Many courts have used channeling injunctions to bring insurance proceeds to the
estate to distribute to the beneficiaries, 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 have been
recognized as serving an appropriate, useful, and beneficial role in the equitable treatment of tort
claimants. For purposes of dealing with mass torts and 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 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
Courts would have jurisdiction to enforce channeling injunctions.
Channeling injunctions are frequently used in connection with funding a trust to deal with
future claimants. While this provision is designed to permit such approaches, nothing here
requires that trusts would be the sole method of compensating future claimants. Other
approaches, such as insurance policies in favor of future claimants, may be superior in some cases.
Moreover, parties may find lower-cost, creative alternatives to deal with future claims. This
proposal is designed to provide the tools for such initiatives.
If the plan proponent had taken all required steps, the discharge of reasonably
identifiable future claims would benefit most creditors. Again, the group of future
liabilitieseligible to be discharged would be limited by the restrictions in the definition of future
claims and by other related provisions.
Section 1141 should be amended to clarify that confirmation binds holders of
future claims that have been filed under the plan, and that any further liability
against the debtor is discharged.
Again, it bears repeating that the claims subject to discharge are those that meet the
applicable standards. Only if a claim is filed (or deemed filed) and "dealt with under the
plan" would the claim be subject to discharge. Any latent claims of victims that result from
the debtors 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.
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
Nothing in this section discharges a debtor from a newly incurred, postpetition liability. In
the same way that any debtor post-filing has a current obligation to meet its postpetition
obligations and to abide by all laws and regulations, the debtor dealing with future claims would
have the same obligation. 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 future claims provision is
designed to deal only with liability for prepetition acts or omissions of the debtor, not to create
immunity from currently arising liabilities.
IV. Successor Liability
The treatment of future claims 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 future claims 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 future claims that might arise as through successor liability if
the same requirements for dealing with 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. This would
not fully insulate a buyer; a tort victim who did not have a claim in the bankruptcy case
would notbe left without redress. At the same time, holders of future claims that are reasonably
identifiable should not be able to receive preferential treatment over other holders by going after
assets on a successor liability theory when the terms of the sale of the assets expressly provide 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
successors purchase price.
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 potential holders of future claims.