Abstract:
Grifters take advantage of situations, latching on to others for benefits they do not deserve. Bankruptcy has many desirable benefits, especially for mass tort defendants. Bankruptcy provides a centralized proceeding for resolving claims, making it a forum of last resort for many companies to aggregate and resolve mass tort liability. For the debtor-defendant, this makes sense. A bankruptcy court’s tremendous power represents a well-considered balance between debtors who have a limited amount of money and many claimants seeking payment.
But courts have allowed the Bankruptcy Code’s mechanisms to also be used by solvent, non-debtor companies and individuals facing mass litigation exposure. These “bankruptcy grifters” act as parasites, receiving many of the substantive and procedural benefits of a host bankruptcy but incurring only a fraction of the associated burdens. In exchange for the protections of bankruptcy, a debtor incurs the reputational cost and substantial scrutiny mandated by the bankruptcy process. Bankruptcy grifters do not. This dynamic has become evident in a number of recent, high-profile bankruptcies filed in the wake of pending mass tort litigation, such as Purdue Pharmaceuticals and USA Gymnastics.
This article is the first to call attention to the growing prevalence of bankruptcy grifters in mass tort cases. By charting the progression of non-debtor relief from asbestos and product liability bankruptcies to cases arising out of the opioid epidemic and sex abuse scandals, this article explains how courts allowed piecemeal expansion to fundamentally change the scope of bankruptcy protections. This article proposes specific procedural and substantive safeguards that would deter bankruptcy grifter opportunism and increase transparency, thereby protecting victims as well as the bankruptcy process.
Commentary:
This article is particularly current, not just because of the mass tort bankruptcies of Purdue Pharma, Boy Scouts of America, etc., but also as Congress starts considering legislation to address the grifts used by third-party seeking releases.
While the article does examine how broader third-party releases evolved from the asbestos litigation to eventually, in 1994, Congress amending the Bankruptcy Code to add § 524(g), which explicitly approved the use of nondebtor releases for insurance companies and channeling injunctions in asbestos litigation so long as the plan meets certain requirements.
As a consumer bankruptcy attorney, it seems unfortunate, however, that this article fails to look across the corporate/consumer divide at how Chapter 13 also provides for third-party protections in §1301. That co-debtor stay is far more demanding and restricted than the releases provide in the Chapter 11 plans of mass tort debtors, requiring at §1301(c) that:
(c) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided by subsection (a) of this section with respect to a creditor, to the extent that—
(1) as between the debtor and the individual protected under subsection (a) of this section, such individual received the consideration for the claim held by such creditor;
(2) the plan filed by the debtor proposes not to pay such claim; or
(3) such creditor’s interest would be irreparably harmed by continuation of such stay.
In practice, this means that a debtor must pay a co-signed debt in full with contract interest in order to provide any protection to a co-signer. Even then, that protection is limited to the duration of the Chapter 13 plan with many creditors holding co-signers liable after discharge for excess interest that accrued due to disbursement delays during the plan. Holding Chapter 11 plans to this same standard would end these third party releases.
That individual consumers, both actual debtors and their co-signers, get treated more harshly that corporate debtors and their grifting obligors is no surprise. It is a truism of skepticism that "consumer always get treated worse than corporations." That this article and the courts have not compared these results is similarly unsurprising, since the converse of that truism also holds, namely that "corporations always get treated better than consumers."
What, however, consumer attorneys are starting to realize is that if a bankruptcy court can use §105 to craft expansive and often very generous third-party releases in Chapter 11 cases, despite that the narrow explicit allowance for asbestos related litigation in § 524(g) could arguably be seen as precluding other releases, bankruptcy courts could similarly use §105 to craft expansive and generous third-party releases in Chapter 13 cases, despite the requirements of §1301.
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