Mass tort victims often wait years for resolution of their personal injury claims, but many who successfully navigate this arduous process will not receive a single dollar of their settlement award. According to applicable bankruptcy and state law, settlement payments may be an asset of the estate that the trustee, exercising its significant authority, administers and distributes to creditors instead of a claimant who had filed for bankruptcy. This distribution power maximizes repayment, a critical counterbalance to the robust protections and benefits that debtors receive in bankruptcy.
Setting aside the perceived unfairness of taking desperately needed money from tort victims, there is something fundamentally unsettling about the process by which bankruptcy law ensnares payment of mass tort settlements. This Article is the first to identify the problem, which it dubs the “settlement trap.” Claimants in the settlement trap must seek relief from the mass tort claims administrator, the trustee, and potentially the bankruptcy court, facing costs and legal challenges at each turn. This Article explores the developing law surrounding treatment of mass tort settlements in consumer bankruptcy and identifies structural and doctrinal pressure points that impose significant confusion and costs on claimants. It supplements legal analysis with original interviews of stakeholders in the ongoing NFL concussion and pelvic mesh cases, case studies that highlight the peculiar mix of incentives that impact whether claimants receive their settlements and illustrate the potential for abuse. Finally, the Article offers a blueprint for reform.
The author is very astute in recognizing that this problem is compounded by "various causes and contributing factors", including:
-The “gang of lawyers” in mass tort cases who have too much control in the process and not enough bankruptcy knowledge,
-The claims administrators that increase costs “out of the claimant’s pockets,”
-The “money-grabber” trustees who “shake down” claimants for their settlement awards
Solutions suggested include judicial "recalibrations" of how personal injury and mass tort awards are understood not to be piles of cash, but long-term disability compensation, which is generally provided with more generous exemptions. Additionally, legislation on the state or federal levels could both clarify when these settlement are assets of the estate and provide greater exemptions.
Relatedly, the Executive Office of the U.S. Trustee (or in North Carolina and Alabama, the Bankruptcy Administrators) could issue guidance and directives to Trustees to clarify and limit when these are taken, including that the trustee’s ability to settle litigation should not be the detriment of the debtor’s interest in exemptions or surplus. That the U.S. Trustee program itself, when it came to the multiple mass tort mortgage settlements a decade ago, failed to take the impact and benefits to the debtors harmed (and often driven into bankruptcy) by bankrupt mortgage servicers does not lend much hope for this improvement.
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