Bankruptcy courts are good at adjudicating tort claims

Economists tend to view tort law differently than lawyers – or state attorneys general – and this difference explains both the advent of bankruptcy trusts in the settlement of tort class actions and the complaints of this last group concerning this evolution.

Tort law covers a person who has been injured because of an action or omission that harms another. Its purpose is to change the essential cost-benefit calculus for a company to do everything possible to prevent this from happening.

A classic example of the application of tort law is the manufacture of the Ford Pinto. Engineers placed the gas tank at the very rear of the car as an economical measure, even though they knew this would make the car more vulnerable to a fire or explosion in the event of an accident. They concluded that liability costs would be less than re-engineering the car to place the tank elsewhere.

The courts found this calculation appalling and contrary to the public interest, and Ford’s liability ended up being many times greater than if it had fixed this vulnerability to begin with.

However, today tort is invariably driven less by the desire to induce proper decisions and more by the impulse of trial attorneys eager to kill.

Today, most major liability lawsuits are brought by litigators who spend a lot of money searching for potential defendants. Most of them are more concerned with making money for themselves – or, for attorneys general, raising funds that would enable them to pursue more headline-grabbing lawsuits – than allocate money to the alleged victims.

For example, a company that tracks tort litigation activity called X-Ante discovered that there were more than 45,000 television advertisements soliciting allegations of alleged injuries from the heartburn drug Zantac during the the first quarter of 2021 alone. The entire litigation advertising campaign for the class action cost nearly $50 million.

Such efforts result in a large number of parties willing to claim harm, whether valid or not, and can cause a company’s potential liability to metastasize far beyond what could be construed. as a proportionate sanction. It also makes the process complicated and time-consuming.

Several companies facing huge and questionable claims for potential damages have opted to get rid of the division with the tort claim and allow the bankruptcy courts to decide the process.

They have placed a considerable amount of money in a bankruptcy trust to cover a first approximation of potential litigation costs, and also remain liable for future contributions.

For example, Johnson and Johnson spun off its baby powder product into a separate entity to treat nearly 40,000 defendants claiming to have been injured by talcum powder, even though the science claiming to show it causes the disease is far from complete. to be established and placed the newly created company into bankruptcy.

Using a bankruptcy trust to make a liability more manageable for an otherwise solvent business makes a lot of sense in many circumstances. Bankruptcy courts are designed to adjudicate these issues so that legitimate creditors can be compensated for their damages in a timely manner while preserving the viability of the business as a whole.

On the other hand, class actions in regular federal courts can take years to be properly adjudicated. For example, the Enron class action lawsuit took seven years to fully adjudicate.

Unfortunately, the courts do not always respect this strategy. For example, 3M has also attempted to go to bankruptcy court to deal with liabilities incurred by Aearo Technologies, which it acquired in 2008. Aearo produced earplugs for the military, and it faces claims that earplugs were difficult to properly insert into an ear canal, rendering earplugs somewhat ineffective. More than 230,000 people have filed complaints saying they suffered hearing loss as a result.

3M placed its Aearo subsidiary in Chapter 11 bankruptcy reorganization shortly thereafter. Aearo has indemnified 3M from all existing and future claims and in return 3M has agreed to fund Aearo’s reorganization process and offer an unlimited amount to settle the earplug litigation.

But last week, a bankruptcy court judge ruled that 3M would not have the same claims protection as Aearo and that its liability in the 230,000 personal injury lawsuits remained. If this decision is upheld on appeal, it would mean those injured and deserving of compensation would likely see any compensation delayed for years, and the viability of 3M, which is vital for any claim to be fully paid, is in question.

It’s important to note that companies aren’t entirely off the hook when they bankrupt their former subsidiaries: 3M and Johnson and Johnson have both contributed billions of dollars in funds intended to compensate those injured. This is because plaintiffs need the original company to remain solvent if they hope to be fully compensated for the damages they have suffered.

My father was a bankruptcy lawyer for fifty years, and he argued that the effectiveness of these courts in judging their (relatively narrow) areas should serve as a model for the creation of other specialized courts.

Bankruptcy trusts are a manifestation of their efficiency: by preserving the original business and determining the appropriate extent of damages and tort actions, the company achieves a much more efficient and equitable outcome than when ‘it allows litigators or attorneys general to obtain egregious indemnities that benefit themselves more than anyone else.

About Leah Albert

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