The Mass Tort Bankruptcy: A Pre-History

Indeed, I have said as much in prior work. See Troy A. McKenzie, Toward a Bankruptcy Model for Non-class Aggregate Litigation, 87 N.Y.U. L. Rev. 960, 999–1010 (2012).

See Richard A. Nagareda, Mass Torts in a World of Settlement 161–82 (2007).

See In re Johns-Manville Corp., 36 B.R. 727, 737–40 (Bankr. S.D.N.Y. 1984) (permitting the debtor to file a bankruptcy petition for the purpose of resolving mass tort liability).

For a discussion of the equity receivership and its development, see Troy A. McKenzie, Bankruptcy and the Future of Class Actions: The Past as Prologue? 90 Wash. U. L. Rev. 839, 846–65 (2013).

The circus had abandoned an earlier experimental treatment of its tents with a fire-resistant coating because the treatment allowed rain to soak through the tents’ canvas fabric.

Although the circus fire dominated newspaper reports in Hartford for months and even years afterward, there are few comprehensive accounts of the disaster and its aftermath. An exception is Henry S. Cohn & David Bollier, The Great Hartford Circus Fire: Creative Settlement of Mass Disasters (1991), from which much of this background description of events is drawn. For other detailed descriptions of the fire, see The American National Red Cross, Hartford Circus Fire: July 6, 1944 (1946), and Stewart O’Nan, The Circus Fire: A True Story of an American Tragedy (2000). For a brief but thoughtful exploration of the legal proceedings after the circus fire, see Note, The Equity Receivership in Mass Tort, 60 Yale L.J. 1417 (1951). For an explanation of the internal corporate convulsions within Ringling Brothers associated with the fire, see J. Mark Ramseyer, Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling: Bad Appointments and Empty-Core Cycling at the Circus, in Corporate Law Stories (J. Mark Ramseyer ed., 2009).

Cohn & Bollier, supra note 6, at 21.

See id. at 35 (recounting the assertion of the circus’s attorney that “the single greatest asset that there was in the picture” was “the good name and earning power of the Ringling Brothers–Barnum and Bailey circus”).

See McKenzie, supra note 4, at 865–68.

For a description of the agency’s extensive role in Chapter X bankruptcy cases, see id. at 869–70.

The Chandler Act also contained a very different provision, Chapter XI, intended for firms that had not issued public securities. A Chapter XI “arrangement,” which was significantly more flexible than a Chapter X reorganization, would look much like a Chapter 11 case today. Indeed, in later years, debtors and their attorneys successfully found ways to circumvent the restrictions of Chapter X by seeking relief under Chapter XI, in spite of the SEC’s efforts to prevent these maneuvers. Eventually, Chapter X and Chapter XI were merged in the Bankruptcy Code’s Chapter 11, with the key features of Chapter XI forming the backbone of Chapter 11. See Hon. Leif E. Clark, Chapter 11—Does One Size Fit All? 4 Am. Bankr. Inst. L. Rev. 167, 170–75 (1996) (discussing the development of a unified business reorganization chapter in the 1978 Code). In 1944, however, it was unlikely that the circus would have succeeded in pursuing a case under Chapter XI instead of Chapter X.

Financial distress is distinguishable from economic distress. A business in financial distress can generate enough revenue to operate but cannot pay off its debts. Reorganizing the firm’s capital structure permits the firm to continue in business. A firm in economic distress, on the other hand, has failed in the marketplace—it cannot generate enough revenue to cover its operating costs, even without considering its debt obligations. Reorganization is unlikely to save the firm.

See Jerome Frank, Epithetical Jurisprudence and the Work of the Securities and Exchange Commission in the Administration of Chapter X of the Bankruptcy Act, 18 N.Y.U. L.Q. Rev. 317, 321–22 (1941).

See id.

Douglas had authored a multivolume report on business reorganization practices that paved the way for the Chandler Act’s passage. That report described in detail the perceived flaws in the receivership system—the pre-Chandler Act form of business reorganization. Securities and Exchange Commission, Report on the Study and Investigation of the Work, Activities, Personnel, and Functions of Protective and Reorganization Committees (1936–1940) [hereinafter SEC Report].

See Report of the Commission on the Bankruptcy Laws of the United States, Part 1, at 249–50 (1973) (describing Douglas’s “Calvinistic” views about business reorganization).

Robert T. Swaine, “Democratization” of Corporate Reorganizations, 38 Colum. L. Rev. 256, 257–59 (1938) (internal quotation marks omitted). Swaine (of the Cravath law firm) was a successful reorganization lawyer and a prominent critic of the Chandler Act. His criticisms centered on the suspicion of the reorganization professionals that seemed to animate Chapter X.

See Troy A. McKenzie, “Helpless” Groups, 81 Fordham L. Rev. 3213, 3221 (2013) (discussing the disfavored position of creditors’ committees under the Chandler Act).

See Jeffrey Stern, Failed Markets and Failed Solutions, The Unwitting Formulation of the Corporate Reorganization Technique, 90 Colum. L. Rev. 783, 787–88 (1990).

See Douglas G. Baird & Robert K. Rasmussen, Control Rights, Priority Rights, and the Conceptual Foundations of Corporate Reorganizations, 87 Va. L. Rev. 921, 925–31 (2001) (explaining the justifications for the railroad receivership).

See McKenzie, supra note 4, at 853–54.

To be sure, the fire could be attributed to the firm’s mismanagement, due to the failure to take the necessary precautions against the known and anticipated hazard of fire. That failure, however, did not require any particular agency expertise to detect. Nor was there any suggestion of self-dealing or conflicted transactions on the part of Ringling Brothers’ management. In short, the scenarios against which federal bankruptcy law had been drawn had little relevance to the circus fire.

This is in essence the “creditors’ bargain” theory of bankruptcy law. See generally Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’ Bargain, 91 Yale L.J. 857 (1982). The theory holds that bankruptcy law should preserve the entitlements and obligations of parties under nonbankruptcy substantive law while maximizing the value of a firm by imposing a central, equitable claims resolution process that prevents the firm’s piecemeal destruction. Although championed by law and economics scholars more recently, the theory finds support in long-established bankruptcy caselaw. See Butner v. United States, 440 U.S. 48 (1979) (recognizing that rights created under state law are preserved in bankruptcy, unless a federal interest requires a different result).

See supra note 18 and accompanying text.

See Eric A. Posner, The Political Economy of the Bankruptcy Reform Act of 1978, 96 Mich. L. Rev. 47, 109 (1997) (“Creditors believed that the formal requirements of Chapter X and SEC participation produced delay, during which costs mounted and assets dwindled, without creating any offsetting benefits.”).

See Cohn & Bollier, supra note 6, at 24–25.

See id. at 29.

See Cogswell v. Second Nat’l Bank, 56 A. 574 (Conn. 1903). The plaintiffs’ attorneys who made the request for a receiver did not know of this caselaw until the judge hearing the application, John Hamilton King of Hartford Superior Court, brought it to their attention. Cohn & Bollier, supra note 6, at 30–31.

Jacobs v. Ringling Brothers-Barnum & Bailey Combined Shows, Inc., 103 A.2 805, 806 (Conn. 1954).

See Note, supra note 6, at 1418 & n.9 (explaining that the receivership acted “as a general moratorium upon creditor rights”).

See id. at 1418 n.10 (noting that the appointment of a receiver abated prior attachments in Connecticut).

Jacobs, 103 A.2d at 806.

See Jacobs, 103 A.2d at 806; Cohn & Bollier, supra note 6, at 37.

Cohn & Bollier, supra note 6, at 39.

One arbitrator was chosen by the Bar Disaster Committee (a group of prominent local lawyers who represented plaintiffs), one was chosen by the circus, and the third was chosen by the state’s Chief Justice. Id. at 42. The only issues for the arbitrators to decide were (1) “the actual receipt of damage to person and/or property” and (2) “the monetary amount of said damage to the person and/or property” of the claimant. Note, supra note 6, at 1419 n. 14. The arbitrators’ award was final, with the only ground for appeal being a defect in the award in the nature of a miscalculation or clerical error, an error as to the identity of the parties or the arbitrators, or a decision by the arbitrators concerning matters not submitted to them. Id.

See Jacobs v. Ringling Brothers-Barnum & Bailey Combined Shows, Inc., 103 A.2 805, 807 (Conn. 1954).

This was defined as yearly income above $750,000. Cohn & Bollier, supra note 6, at 43. Ringling Brothers made additional payments of $60,000, to cover a shortfall in expected insurance proceeds, and approximately $370,000 in tax rebates from the federal government. See Jacobs, 103 A.2d at 807.

Jacobs, 103 A.2d at 806.

See id. at 807.

See Conn. Gen. Stat., 1939 Supp., § 1430e.

Cohn & Bollier, supra note 6, at 46. Of the claims filed, 112 claims under $200 were summarily resolved by the circus and 35 claims were disallowed. The remaining 551 claims were “major” claims for wrongful death and personal injury. See Note, supra note 6, at 1419 n.13.

See, e.g., Joseph P. Kenny, Our Finest Hour—The Circus Fire, available at http://www.hartfordbar.org/PDFs/Our%20Finest%20Hour%20-%20The%20Circus%20Fire.pdf.

Cohn & Bollier, supra note 6, at 51.

Id. at 70–71, 78–79.

See Jacobs, 103 A.2d at 808 (affirming the Superior Court’s award of fees to the receiver).

This discussion does not take into account the possibility of an involuntary petition brought against a debtor by creditors, because such filings are exceedingly rare.

11 U.S.C. § 362(a).

See 11 U.S.C. § 101(5). This broad definition of a claim permits the centralization and resolution of those claims, like the Hartford circus fire personal injury claims, that are not yet reduced to judgment.

See Kane v. Johns-Manville Corp., 843 F.2d 636, 639 (2d Cir. 1988); In re Johns-Manville Corp., 36 B.R. 743, 746 (Bankr. S.D.N.Y. 1984).

Id. at 640.

11 U.S.C. § 524(g).

In a mass tort case, the centralized claims resolution process in bankruptcy is further enhanced by a provision of the Judicial Code that gives the district court in which the bankruptcy case is pending the authority to control venue in pending wrongful death or personal injury claims against the debtor. 28 U.S.C. § 157(b)(5). Thus, cases in state and federal courts around the country can be brought within the administrative control of a single forum when the debtor files for bankruptcy.

See, e.g., Note, The Manville Bankruptcy: Treating Mass Tort Claims in Chapter 11 Proceedings, 96 Harv. L. Rev. 1121, 1121–22 (1983).

See, e.g., Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988) (rejecting creditor’s argument that Johns-Manville’s plan of reorganization was not proposed in good faith).

There are doctrinal gaps in the Bankruptcy Code that can complicate the resolution of mass tort cases. The principal one is the definition of a “claim.” Although the definition is broad, it generally covers only those assertions of liability that arose before the debtor’s bankruptcy (or the confirmation of a plan of reorganization in a Chapter 11 case). That leaves some uncertainty about the treatment of the debtor’s liability for unmanifested personal injuries. See Alan N. Resnick, Bankruptcy as a Vehicle for Resolving Enterprise-Threatening Mass Tort Liability, 148 U. Pa. L. Rev. 2045, 2068–73 (2000) (describing different approaches used by courts to determine whether and when unmanifested personal injuries give rise to “claims” in bankruptcy). In asbestos cases, Congress has largely settled the question by defining a new category of future “demands” that can be resolved through an asbestos trust structure. See 11 U.S.C. § 524(g), (h).

See Lynn M. LoPucki & Joseph W. Doherty, Professional Overcharging in Large Bankruptcy Reorganization Cases, 5 J. Empirical Legal Stud. 983, 985 (2008).

See Stephen J. Lubben, Corporate Reorganization and Professional Fees, 82 Am. Bankr. L.J. 77 (2008); Stephen P. Ferris & Robert M. Lawless, The Expenses of Financial Distress: The Direct Costs of Chapter 11, 61 U. Pitt. L. Rev. 629 (2000). One empirical study found that bankruptcy-related expenses account for about 2.5% of a debtor’s assets in large Chapter 11 cases, excluding pre-packaged cases. Stephen J. Lubben, The Direct Costs of Corporate Reorganization: An Empirical Examination of Professional Fees in Large Chapter 11 Cases, 74 Am. Bankr. L.J. 509, 540 (2000).

There is a lack of empirical research on the question of costs in mass tort bankruptcy cases. A RAND Corporation study of asbestos bankruptcies suggested that the costs in those cases are higher than in an ordinary Chapter 11 reorganization. See generally Stephen J. Carroll et al., Asbestos Litigation (2005). The same study, however, noted that the transaction costs of resolving asbestos personal injury claims through reorganization in bankruptcy followed by a trust structure are “dramatically lower” than in the tort system. Id. at 97.

Elizabeth J. Cabraser, The Class Action Counterreformation, 57 Stan. L. Rev. 1475, 1476 (2005).

Long delays in mass tort bankruptcies have not disappeared entirely. For example, in order to resolve its asbestos liabilities, W.R. Grace & Co. filed a Chapter 11 petition in April 2001. The company’s plan of reorganization was not confirmed until a decade later—January 2011—and did not become effective until the district court affirmed the bankruptcy court’s decision in 2012. Appeals arising out of the case have been percolating to the Third Circuit. See In re W.R. Grace & Co., 729 F.3d 332 (3d Cir. 2013); In re W.R. Grace & Co., 729 F.3d 311 (3d Cir. 2013); In re W.R. Grace & Co., 532 Fed. App’x 264 (3d Cir. 2013).

11 U.S.C. § 524(g)(4)(B)(i). The appointment of a future claims representative was an innovation of the John-Manville bankruptcy that Congress later embraced and codified.

See, e.g., Mark D. Plevin et al., The Future Claims Representative in Prepackaged Asbestos Bankruptcies: Conflicts of Interest, Strange Alliances, and Unfamiliar Duties for Burdened Bankruptcy Courts, 62 N.Y.U. Ann. Surv. Am. L. 271 (2006).

See S. Todd Brown, How Long Is Forever? The Broken Promise of Bankruptcy Trusts, 61 Buff. L. Rev. 537, 593 (2013).

See 11 U.S.C. § 1126(c) (providing that a class has accepted a plan if it is approved by creditors that hold “at least two-thirds in amount and more than one-half in number of the allowed claims of such class.”).

By using the term “future claimants,” I include those with claims and also those with “demands” that may not satisfy the Bankruptcy Code’s definition of a claim. See supra note 55.

See In re Joint Eastern and Southern Distr. Asbestos Litig., 982 F.2d 721, 751–52 (2d Cir. 1992); Kane v. Johns-Manville Corp., 843 F.2d 636, 639 (2d Cir. 1988).

11 U.S.C. § 524(g); see Nagareda, supra note 2, at 161–62.

Id. § 524(g)(2)(B)(ii)(IV)(bb).

As Nagareda explained: The real bargaining leverage in a reorganization proceeding lies with plaintiffs’ lawyers who control large inventories of present claims. They, not so much the futures representative, are the people with whom the debtor must negotiate seriously, for they have the power effectively to veto any proposed reorganization plan under the general voting procedures of Chapter 11 and, especially, the 75% vote required by § 524(g) for the asbestos setting. Nagareda, supra note 2, at 175–76.

See supra note 40 and accompanying text.

Whether or not those claims, as limited by statute, received true “compensation” is, of course, a normative question I leave to scholars of tort law.

The greater availability of high damages in personal injury and wrongful death claims in modern tort law, however, is counterbalanced by the difficulty of pursuing punitive damages in bankruptcy. See In re A.H. Robins Co., 89 B.R. 555 (E.D. Va. 1988) (subordinating punitive damage claims relating to the Dalkon Shield intrauterine device); In re Johns-Manville Corp., 68 B.R. 618, 627–28 (Bankr. S.D.N.Y. 1986) (disallowing punitive damages claims relating to asbestos exposure).

See supra Part II.B.3.

Abram Chayes, The Role of the Judge in Public Law Litigation, 89 Harv. L. Rev. 1281 (1976).

Id. at 1284.

Chayes distinguished public law litigation from the traditional lawsuit, which he described as “a vehicle for settling disputes between private parties about private rights.” Id. at 1282. He identified the following markers of the traditional conception of litigation:

1. The lawsuit is bipolar. Litigation is organized as a contest between two individuals or at least two unitary interests, diametrically opposed, to be decided on a winner-takes-all basis.

2. Litigation is retrospective. The controversy is about an identified set of completed events: whether they occurred, and if so, with what consequences for the legal relations of the parties.

3. Right and remedy are interdependent. The scope of the relief is derived more or less logically from the substantive violation under the general theory that the plaintiff will get compensation measured by the harm caused by the defendant’s breach of duty—in contract by giving plaintiff the money he would have had absent the breach; in tort by paying the value of the damage caused.

4. The lawsuit is a self-contained episode. The impact of the judgment is confined to the parties. If plaintiff prevails there is a simple compensatory transfer, usually of money, but occasionally the return of a thing or the performance of a definite act. If defendant prevails, a loss lies where it has fallen. In either case, entry of judgment ends the court’s involvement.

5. The process is party-initiated and party-controlled. The case is organized and the issues defined by exchanges between the parties. Responsibility for fact development is theirs. The trial judge is a neutral arbiter of their interactions who decides questions of law only if they are put in issue by an appropriate move of a party.

Id. at 1282–83 (internal citations omitted).

See id. at 1291–92; David Rosenberg, The Causal Connection in Mass Exposure Cases: A “Public Law” Vision of the Tort System, 97 Harv. L. Rev. 851, 908–16 (1984).

See Rosenberg, supra note 77, at 859–60.

See Peter Schuck, Mass Torts: An Institutional Evolutionist Perspective, 80 Cornell L. Rev. 941, 980–82 (1995) (discussing, among other developments, market-share liability, damage scheduling, and limited fee and cost shifting).

See Samuel Issacharoff, Private Claims, Aggregate Rights, 2008 Sup. Ct. Rev. 183, 204–05; Jonathan T. Molot, An Old Judicial Role for a New Litigation Era, 113 Yale L.J. 27, 35–36 (2003).

See supra notes 21–22 and accompanying text.

See supra Part I.A.1.

See supra Part I.B.1.

See Richard A. Nagareda, Turning from Tort to Administration, 94 Mich. L. Rev. 899 (1996).

See id. at 945.

See id. at 938–41. Nagareda also understood, of course, that one could accept that administrative law principles are instructive on purely pragmatic grounds without believing in the conceptual relationship to mass tort settlements.

See id. at 946–48.

See id. at 949.

See id. at 933–35.

See Cohn & Bollier, supra note 6, at 28, 35. The simultaneous representation was not considered an unethical conflict at the time.

This is not a trivial point, because the circus faced potential criminal prosecution as a result of the fire.

Cohn & Bollier, supra note 6, at 34–35.

Claimants themselves felt similar scrutiny. Public sentiment, and the fear that the courts would look with disfavor upon claimants who did not agree to the receivership scheme, “strongly influenced acceptance” of the scheme by most claimants. See Note, supra note 6, at 1419 n.12.

The nasty fee dispute that erupted in the case, see supra notes 43–45 and accompanying text, can be explained by two circumstances: the receivership had drawn to a close, and the intervening years had diminished the spotlight on the case.

See supra Part II.B. To be sure, the priority of payment given to tort victims in bankruptcy cases often draws criticism. See David W. Leebron, Limited Liability, Tort Victims, and Creditors, 91 Colum. L. Rev. 1565, 1643–50 (1991); see also Lucian Arye Bebchuk & Jesse M. Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and a Reply to Critics, 82 Cornell L. Rev. 1279, 1313, 1319–20 (1997). Tort plaintiffs are typically treated as general creditors, who receive payment only after secured creditors and priority unsecured creditors are paid in full. An unsecured claim for breach of contract submitted by an asbestos manufacturer’s vendor, for example, will usually carry the same level of priority as the unliquidated tort claim of an asbestos plaintiff suffering from mesothelioma. This result, however, is not a feature of bankruptcy law. Rather, it flows from the nonbankruptcy law entitlements of tort creditors, which are respected in bankruptcy. Because a tort creditor would stand on equal footing as a general creditor with a contract creditor, the two share the same priority in bankruptcy.

See supra Part II.B.3.

In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004). For an especially perceptive discussion of the case, see Nagareda, supra note 2, at 167–79.

So-called prepacks are common and unremarkable in bankruptcy practice. They are analogous to the settlement-only class in the ordinary civil litigation context.

See Combustion Eng’g, 391 F.3d at 241–47.

Id. at 245.