The Cost of Resolving Mass Tort Claims Through Bankruptcy

Seeking relief under the Bankruptcy Code is a common method of restructuring a business pushed into insolvency by tort claims. Under current law, filing a petition under chapter 11 of the Bankruptcy Code allows a business to stay all litigation against it and propose a plan of reorganization that channels tort claims to a settlement trust for valuation and payment. Many plans provide for the funding of the settlement trust through the proceeds of a debtor’s insurance policies and contributions from the debtor and third parties. Settlement trust contributions have historically topped hundreds of millions of dollars, but many recent cases feature settlement pots exceeding several billion dollars.

Historic Mass Tort Settlement Trusts

Johns-Manville Corporation

A bankruptcy court’s authority to enjoin claims against a debtor and place claims in a trust for claim distribution stems from the Johns-Manville Corp. bankruptcy case from the 1980s. Johns-Manville faced tort liability for producing and selling products containing asbestos. Johns-Manville proposed a plan that enjoined claimants from pursuing the reorganized debtor directly and channeled asbestos claims to a trust for valuation and payment. The bankruptcy court confirmed Johns-Manville’s plan, concluding that the equitable powers in § 105 allowed the bankruptcy court to enjoin proceedings in other courts to ensure the efficient administration of an estate and effectuate reorganization. [1] The Johns-Manville plan proposed that the trust would be funded through contributions of the debtor and insurance settlements in an amount exceeding $2 billion plus a percentage of the debtor’s future profits. The Second Circuit Court of Appeals affirmed confirmation of Johns-Manville’s plan. The Johns-Manville settlement trust still exists some 30 years later and held approximately $680 million in assets as of March 31, 2022. [2]

The Johns-Manville case spurred a wave of asbestos and nonasbestos bankruptcy filings seeking to shed tort claims. This ultimately led Congress to enact 11 U.S.C. § 524(g) in the 1994 amendments to the Bankruptcy Code. [3] Other asbestos mass tort bankruptcy cases have resulted in settlement pots ranging between $8 million and $3 billion. The largest settlements include In re Armstrong World Industries Inc. [4] ($2.06 billion), In re Celotex Corporation [5] ($1.25 billion) and In re W.R. Grace & Company [6] ($2.98 billion).

Nonasbestos Mass Tort Bankruptcies

Codification of § 524(g) impacted more than just the asbestos industry, as debtors from other industries continued utilizing the Bankruptcy Code to resolve mass tort claims. One such debtor, A.H. Robins Co., [7] manufactured contraceptive devices that claimants alleged resulted in harmful health conditions. The bankruptcy case ultimately included over 195,000 claims. A.H. Robins’ plan of reorganization proposed channeling the claims to a settlement trust funded by up-front payments of $2.3 billion. Similarly, Dow Corning [8] manufactured silicone breast implants that allegedly caused serious health problems. Dow Corning filed its bankruptcy petition in 1995 and ultimately channeled some 570,000 personal-injury claims into a settlement trust. The confirmation order provided that the initial contributions to the trust totaled $2.35 billion, with contributions totaling $3.8 billion over the plan’s term.

Pending Cases Continue the Trend

Recent nonasbestos mass tort bankruptcy cases stretch the standards for settlement-trust contributions. The U.S. Bankruptcy Court for the District of Delaware confirmed a plan in In re Mallinckrodt PLC [9] that provided for $1.725 billion in trust funding. Mallinckrodt manufactured opioid pharmaceuticals and faced claims by individuals and several states and countries for harm caused by opioid addiction.

Not to be outdone, Purdue Pharmaceuticals L.P. and its affiliated debtors, which also manufactured prescription opioids, filed a plan of reorganization resolving mass tort liability through a trust funded by over $5 billion. [10] Four billion dollars of that amount was to be funded by the Sackler family, the individuals behind Purdue Pharma’s operations. The bankruptcy court confirmed the plan over objections. On appeal, the U.S. District Court for the Southern District of New York reversed the confirmation order, holding that the Bankruptcy Code does not authorize a bankruptcy court to issue nonconsensual releases of nonderivative third-party claims against nondebtors in connection with the confirmation of a chapter 11 plan. [11] An appeal to the Second Circuit is pending, but reports suggest that Purdue Pharma reached a settlement with the Sacklers to contribute $6 billion to the settlement trust. [12]

The Boy Scouts of America (BSA) bankruptcy case involves the resolution of the claims of over 83,000 claimants alleging that Boy Scout leaders sexually abused them as youths. [13] In addition to providing terms for youth protection, the BSA plan proposes a trust fund of more than $2.6 billion, the largest fund established for sexual abuse survivors thus far.

Imerys Talc America Inc. proposed a plan of reorganization putting up over $1 billion between cash contributions and insurance proceeds to compensate claimants harmed by talc produced by the company. [14] The Imerys case remains in mediation.

The limit of settlement-trust funding varies based on the facts of the case, but these recent mass tort bankruptcy filings suggest that channeling claims in bankruptcy is an increasingly preferred option for resolving mass tort cases.