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Mass Tort Chapter 11 Bankruptcy: Collective Fairness or Asset Shielding

by | Oct 21, 2021 | Bankruptcy, Bankruptcy, Debt, Litigation

By: Laura Day DelCotto

There is a huge public policy debate currently going on in the corporate bankruptcy world over mass litigation/mass tort chapter 11 cases. The recent mass tort defendants who have ended up in a chapter 11 include the Boy Scouts of America, USA Gymnastics, Purdue Pharma, and many Catholic Dioceses all across the US. The recent filing by the “talc” subsidiary of Johnson & Johnson is merely the latest of many prior chapter 11 filings.

In the 1990s, the asbestos litigation cases were in full force, and the Bankruptcy Code was amended to add special provisions for mass tort asbestos situations, primarily being the channeling trusts/channeling injunctions expressly authorized in 11 U.S.C. Section 524(g). However, this section is applicable only to asbestos defendants.

Bankruptcy attorneys and corporate attorneys are creative people. The types of reorganization structures for mass tort cases are full of innovative ideas. The most recent cases include victims’ settlement trusts, and creation of a “public benefit company” after a bankruptcy filing to handled future profits for both current and future victims.

On the one hand, there are policies which favor bringing everyone into one centralized setting (in bankruptcy court) in order to stay hundreds or thousands of separate lawsuits, stop the attorney fee drain in defending in multiple forums, and treat all victim claims in a fair, organized, and pro rata basis. The “Informational Brief” filed by the Debtor in the J&J case (In re LTL Management LLC, Case No. 21-30589 (Bankr. W.D.N.C.) is an interesting 132 page criticism of the “plaintiffs’ bar” and its so-called “tactics.”

On the other hand, some commentators and victim attorneys argue that the chapter 11 reorganization plans are exploitative and unfair to victims, forcing them into complex settings, forum shopping, and intra-victim fighting among different victim situations, creating disparate treatment. One example is current vs. future victims.

These settings are exceedingly complex but also relatively straightforward at a 30,000 foot level. Corporate debtors, often under at least practical financial control of aggressive secured lenders and/or CROs who are experienced in chapter 11, will continue to come up with ways to seek to shelter assets and obtain third party releases for non-debtor parties in interest. We will continue to watch these issues for whatever legislative or judicial responses begin to develop. While we have a very old chapter 11 in Kentucky that adopted some channeling trust concepts, it is unknown at this juncture how a Kentucky bankruptcy court will rule on these issues.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.