Tort defendants that file for bankruptcy

Bankruptcy proceedings are designed to resolve all claims against a bankrupt firm, including both current claims and claims that will come due in the future. As a result, they are one method of resolving mass torts.. The sale proceeds are used to pay all claims, including tort claims, according to a predetermined priority ordering. If the bankrupt company instead reorganizes, it continues to operate rather than shutting down. Creditors then must approve a reorganization plan that provides for partial payment of all claims, with the funds coming mainly from the reorganized firm’ future profits. This procedure preserves the company’s going concern value by allowing it to emerge.

.

Most mass tort defendants that file for bankruptcy reorganize. For bankrupt asbestos defendants, this choice makes sense because most of them no longer produce asbestos-containing products and would be profitable if not for their asbestos liabilities. The reorganization plan always involves setting up a compensation trust that takes over responsibility for paying present and future asbestos claims. The funding for the trust comes from the reorganized firm’s future profits and from its insurers, who contribute money to the trust in return for a discharge from liability to the firm’s tort claimants.   Asbestos producers have filed for bankruptcy; these bankruptcies have worsened the asbestos crisis rather than resolving it, by spreading the litigation to new defendants. The problem is that, when an asbestos defendant goes bankrupt, it stops paying claimants until its compensation trust begins to operate and even then, the value of payments will be low. As a result, plaintiffs’ lawyers shift their litigation focus to non bankrupt defendants, since the latter are more lucrative. In addition, many states have “joint and several liability, which means that each defendant found liable for a damage award is responsible for paying up to the entire amount if other defendants don’t pay their shares. Therefore, when one defendant goes bankrupt, the liability of the remaining defendants increases. Similarly, if an insurer fails, some of its asbestos liabilities are transferred to other insurance companies, because multiple insurers are liable for the same claims under the triple trigger doctrine. Thus, an important problem with bankruptcy is that it contains no mechanism for coordinating among multiple defendants that share liability for tort claims.