By: Donald L Swanson
The existence of a bankruptcy option is a good thing for any debtor-creditor situation that is highly stressed—whether the bankruptcy option is used or not.
This is especially true in mass-tort cases where a potential exists for (i) hugely-disparate results for similarly situated plaintiffs, and (ii) debilitating delays in the progress of litigation.
Why, for example, should one plaintiff get multiple millions of dollars, while another plaintiff (who used the same product and incurred the same type of harm) gets nothing or only a few hundred thousand dollars—based on legal technicalities? Or, why should plaintiffs be forced to wait for a decade or more to get litigation relief?
- Is that justice for anyone?
But that’s what often happens in mass tort cases outside bankruptcy.
Bankruptcy Possibility = Incentive to Settle
Here’s something every experienced bankruptcy practitioner knows:
- What might happen in bankruptcy serves as an incentive for debtors and creditors to negotiate a settlement outside of bankruptcy—especially when that settlement is better-than-bankruptcy for everyone involved (i.e., for debtors and creditors, alike).
I like to brag that I’ve represented debtors and creditors in many hundreds of financially stressed circumstances outside bankruptcy. And only a small percentage of the debtors involved end up in bankruptcy.
- That’s because the prospect of what might happen in bankruptcy creates an incentive for debtors and creditors, alike, to achieve a better-than-that result, if possible.
No Bankruptcy Possibility = Bad Results
Conversely, when bankruptcy is not a viable option, financially-stressed circumstances frequently careen into bad results for everyone.
Take, for example, the 1980s Farm Crisis. Lots of farmers were in financial stress back then, and many filed Chapter 11 to reorganize. But those efforts failed—nearly every one of them—because of Chapter 11’s absolute priority rule. The result, back then, was that secured creditors ultimately ended up in lien foreclosures—nearly all of which resulted in unmitigated financial disaster for everyone.
That’s why Congress enacted Chapter 12 in 1986—to provide a viable bankruptcy option that could help everyone involved (debtors and creditors, alike) achieve a better result.
Similarly, before Subchapter V’s existence, smaller businesses could not reorganize under regular Chapter 11, for the same reason—the absolute priority rule. And those smaller businesses, when facing financial stress, simply ceased to exist.
But Subchapter V is now a viable bankruptcy option, which results in many settlements between debtors and creditors outside bankruptcy. That’s because the prospect of what might happen in bankruptcy gives both debtors and creditors a standard by which an out-of-bankruptcy resolution that’s better-than-bankruptcy might be achieved.
I know these things are true because I’ve lived them for many decades as a bankruptcy practitioner, representing both debtors and creditors.
Mass Tort Cases
The existence of a bankruptcy option in mass tort cases provides a valuable standard by which debtors and creditors, alike, have an incentive to reach settlements that (i) maximize value for claimants, (ii) expedite resolutions, and (iii) allow for similar results for all similarly situated claimants.
Bankruptcy settlements in mass tort cases, with high levels of creditor consents, are common in many different tort contexts. And the existence or threat of a bankruptcy filing helps all parties focus on getting to a result, promptly and efficiently, that maximizes value for claimants and provides similar results for similarly situated claimants.
That is a good thing.
3M Combat Arms Earplugs Settlement—and Bankruptcy-Related Factors
On March 26, 2024, 3M issues this report about a settlement of the Combat Arms Earplug claims against it:
- more than 99% of claimants are participating in the settlement; and
- under the settlement, 3M will pay up to $6 billion to claimants over the next six years;
But risks and uncertainties are involved. These uncertainties center on the ability of 3M to have sufficient assets and income to make the settlement payments. Risks beyond 3M’s control include:
- worldwide economic, political, regulatory, international trade, geopolitical, capital markets and other external conditions;
- foreign currency exchange rates and fluctuations in those rates;
- legal proceedings that aren’t resolved by this settlement;
- competitive conditions and customer preferences;
- supply chain issues;
- 3M’s credit ratings and costs of capital;
- recoveries against insurers; and
- etc.
Bankruptcy Effects
There are lots of “I told you so” comments about this settlement. Such comments are along these lines:
- “See . . . see . . . once the bankruptcy option was removed, the parties reached a settlement!!!!”
- “See . . . see . . . bankruptcy was bad for this case!
Such comments are misplaced. The reality is this: the possibility of another bankruptcy filing by 3M, in greater-distress circumstances, provide an incentive for all the parties (debtor and creditors, alike) to reach this settlement. Here are a few reasons why:
- Dismissal of the bankruptcy made 3M realize it would need to put up a lot more cash to achieve a settlement.
- The sheer volume of money 3M must pay under the settlement raises a feasibility risk—i.e., Will Debtor be able to pay the total settlement amount over the coming years?
- If the economy were to go south, without a settlement, and if 3M were required to go into bankruptcy itself (and not merely a subsidiary entity), 3M’s ability to pay billions of dollars would diminish dramatically.
- At some financial recovery point, creditors often say: “This amount is enough and is better than a risk of getting nothing or next to nothing; so let’s get this money in the door and paid to me as soon as possible.” The possibility of a bankruptcy filing often heightens this interest in getting a prompt resolution and payment.
Conclusion
As a long-time bankruptcy petitioner, the anti-bankruptcy bias, in discussions on mass-tort cases, is frustrating.
That’s because the very existence of a viable bankruptcy tool can help all parties get to a prompt resolution that maximizes value for claimants and treats similarly situated claimants similarly. And that’s a good thing.
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