Bankruptcy by Another Name

abstract. In a recent essay, Abbe R. Gluck, Elizabeth Chamblee Burch, and Adam S. Zimmerman object to the increasing use of bankruptcy to resolve mass-tort claims. They and others are concerned that bankruptcy reduces plaintiff voice, impedes the development of state law remedies, and limits discovery that can drive state and federal regulatory interventions. This Response addresses these critiques. Contrary to popular descriptions of the bankruptcy system, bankruptcy courts do not simply aim to maximize economic efficiency and financial recoveries. Bankruptcy includes numerous procedures, including robust disclosure, bellwether trials, future-claims representatives, and voting, to ensure a fair process and promote noneconomic goals. These provisions advance the exact values that critics argue are missing from the bankruptcy process. And, to the extent that bankruptcy is insufficiently attentive to noneconomic values, it is reasonably easy to tweak the system we have to accommodate these goals more effectively.

Introduction

In the past few years, bankruptcy has emerged as a popular tool for resolving mass-tort litigation. Academics have largely greeted this development with skepticism and alarm, arguing that large corporations turn to bankruptcy to reduce expected payouts at the expense of plaintiffs who have been harmed by corporate misconduct.1 Courts, too, have begun to push back against the use of bankruptcy to resolve mass-tort cases.2 In an earlier article, we defended mass-tort bankruptcies as providing a process that can offer significant economic benefits to both plaintiffs and corporate defendants.3 Bankruptcy, we pointed out, is designed to prevent a race to the courthouse that can destroy enterprise value.4 By consolidating proceedings in a single forum and binding holdouts and future claimants, bankruptcy provides a vehicle for quickly and efficiently resolving complex mass-tort litigation. This can leave all parties better off, increasing plaintiff recoveries and helping a corporation resolve lawsuits that would otherwise drain resources.

Our defense of bankruptcy was based on a view that it could—in the right cases and under the right circumstances—provide an efficient and cost-effective means of resolving proceedings with multiple claimants.5 Since we first published our article, several scholars have responded with noneconomic objections. For example, Pamela Foohey and Christopher K. Odinet argue that bankruptcy “allow[s] defendants to leverage chapter 11 to silence victims and facilitate cover-ups.”6 Most directly, in this journal, Abbe R. Gluck, Elizabeth Chamblee Burch, and Adam S. Zimmerman (GBZ) cite our article as an example of how “[t]hose who defend bankruptcy’s use in this context rarely engage with the lost public-regarding values of litigation.”7

Our prior defense of bankruptcy started from a different fundamental theory of civil litigation. In our view, litigation is about redressing wrongs involving two or more parties. The optimal system is the one that most efficiently gives plaintiffs whatever compensation they are legally owed. Bankruptcy, we argued, offers more money to plaintiffs and allows corporate defendants to focus on valuable economic output. It provides a structured mechanism for aggregate voting and settlement that is not available elsewhere in the legal system, and thus a system for mass-tort plaintiffs to negotiate for and vote whether to accept (or reject) settlements.

GBZ and those who worry that bankruptcy undermines public-regarding values, by contrast, are part of a long tradition of scholars who regard litigation as a complement to—rather than a means of implementing—state and federal regulation. For them, bankruptcy is objectionable because bankruptcy courts “don’t typically develop state tort doctrines,” “don’t typically engage in broad discovery,” and “rarely take the time to utilize juries . . . or take testimony from tort victims anxious to have their day in court.”8 Their concern is that bankruptcy does not accommodate process-based virtues that benefit plaintiffs, third parties, and the public at large. On this account, discovery, redundancy, and plaintiff voice provide “public-regarding” benefits that cannot easily be measured in economic terms.

In this Response, we respond to GBZ and others on their own terms. Even accepting GBZ’s premise that victims’ monetary recoveries and their right to vote in favor of settlements should sometimes be sacrificed for noneconomic public-regarding values,9 and that policymakers can somehow figure out how to balance the tradeoff between economic and noneconomic and private and public values, bankruptcy is still superior in many mass-tort cases because it can accommodate noneconomic and public values as effectively as—and often more than—existing alternatives.

In responding to our initial defense of bankruptcy, GBZ invoke Owen Fiss to suggest that the “public good” should be considered “rather than the mere private ends of individual dispute resolution and money changing hands.”10 This is an argument for a litigation system that produces potentially lower payouts to victims to promote broad, nonmonetary, but important social values. Such a system involves difficult and potentially intractable tradeoffs. Individual litigation can lead to lower and more inequitable payouts as plaintiffs receive different recoveries based on when their claims manifest, what state they happen to live in, and the jury they receive.11 Aggregated litigation in bankruptcy can reduce individual voice and might limit the development of private law remedies.12 How does one balance these incommensurable competing values? And who makes the call?

Those are difficult questions. But what if the trade-off has been exaggerated? What if bankruptcy can accommodate noneconomic and public-regarding values and still facilitate efficient settlement and reorganization goals? Our primary argument here is that bankruptcy can do these things. It can (and does) accommodate noneconomic and public-regarding values—at least relative to all available alternatives—while also facilitating efficient settlement. Indeed, contrary to GBZ’s arguments, there is nothing about bankruptcy that is inherently incompatible with noneconomic goals, and the evidence from actual practice does not support broad claims that bankruptcy does worse on these dimensions than the available alternatives.

The disconnect arises because GBZ—like many bankruptcy critics—work from an inaccurate view of the bankruptcy process. They assume an ethereal “bankruptcy culture”13 that ruthlessly pursues efficiency while preventing bankruptcy courts from developing law, reviewing cases on the merits,14 and providing victims with an opportunity to be heard.15 They argue that bankruptcy prevents plaintiffs from testing novel tort theories,16 that it fails to protect future claimants,17 and that it limits discovery that supports future regulation.18 These descriptions, however, do not match reality.19

In practice, bankruptcy can and often does support public-regarding, noneconomic values, often more effectively than nonbankruptcy alternatives. The Bankruptcy Code already requires judges to provide many of the procedures that bankruptcy skeptics complain it lacks—including review of substantive law, referral of cases for trial,20 extensive discovery,21 and the broadest protection of victim’s rights to be found in any existing aggregated judicial procedure22—and it affords bankruptcy judges the power and discretion to go even further to enhance plaintiffs’ voice and certify trials to state and district courts.23 Because bankruptcy both is efficient and supports the realization of noneconomic goals, Troy A. McKenzie, one of the first scholars to recognize the overlap in these fields, was correct in his “tentative assessment . . . that the essentials of the bankruptcy process make it a superior framework, at least for the most vexing mass-tort cases.”24

This debate is far from academic alone. As we write, legal challenges to bankruptcy courts’ authority to resolve collective proceedings mean that approximately $10 billion in money set aside in an opioid settlement cannot be disbursed.25 Similarly, over $2 billion in funds for victims of sexual abuse in the Boys Scouts are at risk,26 as are settlement negotiations in several other mass-tort cases including claims related to asbestos, opioids, and sexual-abuse claims against Catholic churches.27 Blocking these payments and settlements in exchange for nonmonetary values is a complicated choice. Doing so for an illusory tradeoff is an obvious mistake.

A final word about some assumptions underlying this debate: In our view, scholars should think about the optimal mechanism for resolving mass torts and develop an account of what reforms can be made to existing resolution schemes to achieve that system. If one accepts, as we and GBZ do,28 that some level of aggregation is necessary, then the task at hand is to structure an aggregate proceeding to realize the various goals of litigation. This includes finding a balance between efficiency and plaintiff voice, and between financial expediency and public-regarding procedural virtues. In our view, bankruptcy—with its robust discovery, voting mechanism, and flexibility—is the best hope to achieve that balance. Bankruptcy already provides an efficient mechanism to resolve mass torts. With small reforms, it could further accommodate procedural and public-regarding values. Scholars and policymakers should consider reforming the bankruptcy system to realize these values rather than rejecting it outright in favor of inferior alternatives. Of course, one might also achieve the same outcome by designing a new process from scratch and calling it something else. We are confident, however, that such a system would include the core features of bankruptcy. Here, too, Troy McKenzie was right in observing that “[b]ankruptcy is simply another form of aggregation.”29

This Response proceeds in three parts. Part I describes the public-goods theory of litigation. Part II provides a brief sketch of the bankruptcy process and describes how bankruptcy can promote public-regarding and noneconomic values. Part III acknowledges that bankruptcy, like other tools for obtaining global peace, may not perfectly accommodate all these values and proposes reforms that would allow bankruptcy to promote noneconomic values more effectively.

I. noneconomic values

At its core, GBZ’s argument against bankruptcy is an argument against a process that gives plaintiffs who participate in the bankruptcy proceeding a chance to vote for a negotiated settlement. As we discuss below, there is no bankruptcy resolution unless plaintiffs vote to approve the reorganization plan. A majority of plaintiffs can always demand fuller protections as a condition of settlement. The legitimacy of this settlement is therefore the crucial point of dispute.30 The antisettlement position is consistent with GBZ’s criticisms of aggregation—majority voting is, after all, coercive. As they describe it, their position against settlement aims to place certain public goods on par with or ahead of private choice.31 Of course, because every limitation on private choice is coercive, their critique can be brought against most forms of aggregation. The question, then, is which form of coercion best serves the public-regarding, noneconomic values that GBZ and other critics pursue.

Broadly speaking, there are two reasons critics argue that bankruptcy fails at achieving noneconomic values. First, they worry that bankruptcy does not support the regulatory process as effectively as piecemeal litigation.32 This account of civil litigation understands tort law to serve broad regulatory goals such as deterring corporate risk-taking and increasing transparency about corporate affairs and corporate conduct.

Civil litigation complements government regulation in a few ways. The information that comes out in discovery can itself support litigation that deters corporate misconduct. It can also support the formal regulatory process by providing information about the harms caused by products. This synergistic relationship between litigation and regulation was, according to GBZ, perhaps most apparent in tobacco and opioid litigation, where lawmakers imposed more stringent regulations partly in response to information that became available in discovery.33 Litigation can also support the development of novel private-law theories. As GBZ observe, “To state the obvious, tort law would not develop if courts did not render decisions.”34 A related argument for imposing guardrails on aggregated proceedings is that redundancy serves important federalism values. When different plaintiffs bring suit in different jurisdictions, multiple judges will weigh in on the same issues. That, in turn, can “reduc[e] error and judicial bias and . . . encourage[e] salutary development of the common law through multiple layers of independent judicial review.”35

Second, critics argue that bankruptcy cuts off noneconomic remediation for the harms that individuals suffer as a result of corporate or individual misconduct.36 This argument takes seriously the remedial benefits that plaintiffs receive from getting their day in court, confronting their wrongdoer, and enjoying the dignitary values associated with due process. These benefits protect rights that cannot be vindicated by monetary compensation. If litigation is about remediating dignitary harms, participating in the civil-litigation system may be just as important as financial compensation. Another virtue of civil litigation is that the due-process values associated with plaintiff participation serve an important legitimating role. In some contexts, litigation empowers plaintiffs to select the forum in which to adjudicate their claim, the lawyer who will represent them, and the interests counsel will pursue in litigation.37

Critics have argued that bankruptcy curtails these rights. These critiques assume a “bankruptcy culture” that prioritizes efficiency over all other values:

Unlike ordinary state and federal trial courts, bankruptcy courts don’t generally assign responsibility for widespread harm; they preserve and efficiently distribute resources. Petitioners in bankruptcy aren’t called “victims” or “plaintiffs”; they are called “creditors” with limited voting rights over the distribution of an estate. Bankruptcy courts don’t typically develop state tort doctrines. They don’t typically engage in broad discovery designed to reveal accountability and spur policy reform. Instead, bankruptcy courts streamline. Any discovery tends to focus on the debtor’s financial health. And, because bankruptcy’s culture centers on efficiency and preventing further depletion of assets, bankruptcy courts rarely take the time to utilize juries themselves, or remand most cases for further development in trial courts, or take testimony from tort victims anxious to have their day in court.38

These statements do not accurately describe bankruptcy. Nor do they reflect the procedural rights and protections afforded to plaintiffs in bankruptcy. For one, it is simply not true that bankruptcy keeps information about corporate misconduct out of the public’s eye.39 Bankruptcy judges cannot cut off discovery to facilitate an efficient reorganization. To the extent that plaintiffs are not satisfied with a debtor’s disclosure statement, they can veto a reorganization plan until the debtor produces additional information. It therefore provides an enormous amount of information that can support legislation to reduce the risk of future corporate misconduct. Nor is bankruptcy incompatible with federalism values.40 To the contrary, it can facilitate the development of substantive state law in a variety of ways, including bellwether trials, transferring cases to other courts for trial, and certification to state and federal courts. Bankruptcy provides a forum in which plaintiffs lead negotiations with the debtor and a robust procedure for court-supervised supermajority voting among claimants, one which does not exist anywhere else in our legal system.41 In short, the bankruptcy process empowers victims and makes their participation as plaintiffs a condition of any reorganization plan.

Bankruptcy also includes additional protection in the form of the U.S. Trustee and the bankruptcy examiner.42 The U.S. Trustee is a representative of the Department of Justice that monitors the bankruptcy process in every case. The Trustee can take legal action to prevent fraud and abuse, refer matters to be investigated for criminal prosecution, review disclosure statements, and make sure that professionals such as attorneys charge reasonable fees. Bankruptcy examiners can be appointed to investigate the debtor’s prepetition conduct and provide additional transparency to parties that are affected by the bankruptcy filing.43

Of course, bankruptcy, like all litigation, usually results in settlement, and when it does, the parties may prioritize private benefits and efficiency over public goods such as the development of state law. Sometimes bankruptcy’s aggregation and voting mechanisms prioritize plaintiffs’ collective economic recoveries over the voice of dissenters. But, as Part II demonstrates, if it gets the balance wrong, it is not because the bankruptcy system is incapable of supporting noneconomic values, but rather because the supermajority of victims has prioritized economic recoveries.

II. the bankruptcy process

While recent critiques of bankruptcy have stressed bankruptcy courts’ authority to act coercively, the reality is that bankruptcy facilitates negotiation among different parties. As part of this negotiation, Chapter 11 empowers plaintiffs to drive negotiations with debtors and other creditors, to assert their rights in state and federal courts, and to participate in every part of the bankruptcy settlement. It requires disclosure of a large amount of information about the debtor’s affairs—information that is subject to negotiation among claimants, and which has previously supported regulatory interventions aimed at responding to the policy gaps that contributed to corporate wrongdoing.

A. The Origins and Contours of Mass-Tort Bankruptcies

Recent scholarship that critiques the use of bankruptcy in mass tort cases reprises arguments that have been levied against the bankruptcy process for as long as courts and Congress have sanctioned the use of bankruptcy as a forum for resolving collective proceedings.44 Since the Code’s passage in 1978, bankruptcy has offered a ready-made solution to the collective-action problems posed by mass torts and has been used as an efficient means of resolving complex collective-tort proceedings. In those early years, one reason civil litigation was unappealing for plaintiffs was that high administrative costs reduced plaintiff recoveries and became difficult for corporations to manage. According to one estimate, plaintiffs in asbestos cases recovered only thirty-nine cents out of every dollar spent in asbestos litigation—the other sixty-one cents went to transaction costs such as attorney’s fees.45 As a result, all parties—including plaintiffs—needed a different option to achieve settlement and turned to bankruptcy.46

It is important to emphasize this point: It is not just the debtors who prefer bankruptcy. Victims and their lawyers are often the strongest advocates of the bankruptcy system. In most mass-tort bankruptcies, including Boys Scouts and Johnson & Johnson, large groups of victims support the bankruptcy filing and settlement.47 In Purdue’s bankruptcy, groups representing victims who filed briefs at the Supreme Court came out overwhelmingly on the side of the bankruptcy and its settlement. The respondents filing briefs in favor of the bankruptcy settlement in that case included:

· The Ad Hoc Group of Individual Victims of Purdue Pharma (which is comprised of over 60,000 victims and “was the party most involved in advocating for the specific interests of personal injury victims throughout the confirmation hearing, including on the topic of third-party releases and their impact on individual victims”)48
· The Official Committee of Unsecured Creditors (which is constituted mostly by opioid victims and states representing their interests)49
· The Ad Hoc Committee of Governmental and Other Contingent Litigation Claimants50
· The Multi-State Government Entities Group51

On the other side, only two claimants—one lone victim52 and a class of Canadian municipalities53—filed briefs joining the U.S. Trustee in opposing the settlement.

Returning to the origins of mass-tort bankruptcies, it is perhaps because of the efficiencies of its streamlined process and the support from debtors and victims alike that, despite controversy surrounding the use of bankruptcy in asbestos cases, Congress ultimately sanctioned procedural innovations that had developed to facilitate settlements of asbestos litigation. Bankruptcy courts had gone to extraordinary lengths to find a way to resolve complex proceedings involving existing and future plaintiffs with different claims. In 1982, the Manville corporation filed for bankruptcy to resolve all its asbestos claims. Manville’s reorganization plan, like Johnson & Johnson and other debtors who have filed in the past few years, was controversial because Manville appeared to be solvent at the time of its filing.54 Some plaintiffs challenged Manville’s bankruptcy filing on the ground that the bankruptcy system should only be about resolving consensual debts, not mass torts.55 Nonetheless, in 1988, the bankruptcy court approved an ambitious and procedurally innovative reorganization plan.56 The plan included a settlement trust to compensate everyone with an asbestos claim against Manville and a channeling injunction that required that future claims be brought against the trust.57 After considerable controversy, Congress in 1994 enacted Section 524(g) of the Bankruptcy Code, which authorized the trust and channeling injunction that was invented in the Manville bankruptcy.58 With Congress’s blessing, most asbestos claims were channeled to bankruptcy courts.

In creating Section 524(g), Congress took care to give plaintiffs special procedural protections. For example, Section 524(g), which blessed Manville’s channeling injunction, requires that a supermajority of tort claimants vote to approve the plan.59 It further requires the appointment by the court of a future claims representative to protect the interests of plaintiffs whose injuries have yet to manifest.60 These provisions of the Code ensure that no plan is confirmed unless a vast majority of plaintiffs who vote on the plan approve it.61 They also respond to concerns the Supreme Court has expressed in the context of class actions about interplaintiff conflict: If the defendant can only provide a certain amount of money to settle claims, why would existing plaintiffs and their attorneys have an incentive to advocate on behalf of plaintiffs whose injuries have yet to manifest?

Congress also stipulated that bankruptcy courts should only authorize channeling injunctions when the “pursuit of such demands outside the procedures prescribed by such plan is likely to threaten the plan’s purpose to deal equitably with claims and future demands.”62 This requirement builds on other procedural protections, such as the U.S. Trustee and the court-appointed future claims representative, which aim to ensure representation for future claimants and other parties who may not be in a position to advocate to protect their own interests.

Bankruptcy became a popular forum for resolving asbestos claims in part because it allowed courts to consolidate diverse claims that otherwise could not be resolved in a single proceeding. Because asbestos plaintiffs had suffered different harms in many different states, courts felt that the claims should not be consolidated in a class proceeding.63 Courts also expressed skepticism of judicial attempts to secure global peace through the class action by binding future claimants.64 When the Supreme Court considered this issue, it was particularly concerned that existing claimants and their representatives may not adequately or zealously represent the interests of future claimants.65 Interestingly, at the time, the Supreme Court suggested that bankruptcy might be the proper way to resolve mass torts with unknown future claimants, pointing out that a negotiated class settlement would “significantly undermine the protections for creditors built into the Bankruptcy Code.”66 It also pointed out, with seeming approval, that Congress had provided for bankruptcy resolution of future asbestos claims in Section 524(g) of the Bankruptcy Code.67

B. Bankruptcy’s Aggregating Features

Bankruptcy consolidates claims in a single forum to facilitate a global settlement of related claims. As soon as a debtor files a bankruptcy petition, the automatic stay enjoins all actions—including tort claims—against the debtor.68 At that point, the bankruptcy court has jurisdiction over the debtor and nearly all its assets—including assets that are currently in the possession of nondebtor third parties.69 Once the debtor has filed, a creditor who wants to participate in the bankruptcy must file a proof of claim.70 The debtor then files a plan of reorganization,71 at which point the creditors vote on whether to accept the plan of reorganization.72 If the plan is confirmed, it acts as a final disposition of claims against the debtor.73

To approve a plan of reorganization, the debtor must convince interested parties to vote to approve the plan. This is the part of a comprehensive negotiation process overseen by the bankruptcy court. The first step to approve a plan involves disclosure.74 The debtor must provide a statement with an accounting of its affairs to parties that hold claims against the debtor’s assets.75 In the disclosure statement, the debtor classifies claims that can be brought against it, lists its assets, and explains how it plans to emerge from bankruptcy.76 The bankruptcy judge must approve the disclosure and find that it includes sufficient information for claimants to make an informed decision.77

These aggregating features do not, however, mean that bankruptcy courts have the authority to wipe out property or tort claims. One of the foundational principles of bankruptcy law is that it is procedural and intended to respect nonbankruptcy substantive law as much as possible.78 Contrary to what critics imply, bankruptcy courts do not make up tort law or ignore state tort law. They can estimate claims for procedural purposes, but they do not have the power to determine liability or liquidate damages other than according to state law.79

In fact, when there is uncertainty about state law remedies, bankruptcy judges have the same power as other federal courts to certify a question to a state court. When appropriate they can (and sometimes indeed must) also send cases to a district court for trial—the term in practice is “withdraw the reference”—or lift the automatic stay to allow cases to be litigated in the forum (state or federal) that would have heard the case in the absence of a bankruptcy filing.80

When the reference is withdrawn, litigation proceeds in a federal district court. Cases can be withdrawn by a district court on its own motion or by a motion filed by a party in interest. Withdrawal can be mandatory if the bankruptcy proceeding involves a significant and unresolved federal question.81 Alternatively, district courts may exercise their discretion to withdraw a case.82

When the automatic stay is lifted, the parties can proceed with litigation in other forums, including state or federal court, as they would have done if the bankruptcy proceeding had not been initiated.83

GBZ suggest the bankruptcy courts rarely send cases to other courts for jury trial.84 But, as they point out, the same is true in the multidistrict litigation (MDL) system.85 The driving force in both contexts are the parties and their desire for settlement. While precise numbers are unavailable, we are skeptical that bankruptcy judges possess some unique disdain for referring cases to trial.86 Anecdotal evidence suggests that bankruptcy judges do send tort cases to state or federal district courts for trial when asked. Examples of such cases are easy to find.87

In addition, bankruptcy judges’ approval of a mass-tort settlement is subject to de novo review by a federal district court.88 And if no settlement is reached, personal injury tort claimants can demand that their case be sent to a district or state court for jury trial. This is required because Section 157 prevents bankruptcy courts from finally valuing or estimating personal injury or wrongful death claims for “purposes of distribution.”89 For state cases, the procedural mechanism for such a demand would take the form of a motion to lift the automatic stay so that a trial could proceed in the state court.90 For federal cases, it could be a motion to lift the stay or to refer the case to the district court under 28 U.S.C. § 157, which requires that personal injury and wrongful death suits be “tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose.”91

Section 157 changes bankruptcy’s bargaining dynamics. If the debtor wants to avoid a series of jury trials, it must propose a settlement that gets supermajority support from the claimants. Of course, tort claimants do not always invoke Section 157. As is the case in all forms of civil litigation, if the defendant is not contesting liability or damages, or if the parties reach a settlement, no trial is necessary. On this score, the only difference between bankruptcy and MDL is that dissenting plaintiffs are brought into the settlement. But, as later explained and as widely recognized in the relevant literature, the existence of “choice” to dissent in MDL is questionable.

Beyond that, after a mass-tort bankruptcy settlement, individual victims still have the right to opt for litigation in state tort systems. That statement may surprise most readers because critics of bankruptcy routinely get this wrong. For example, GBZ say that “bankruptcy courts order payment of all claims, often without testing their merit as the tort process could”;92 and: “Unlike even mandatory multidistrict litigation, no one can opt out of bankruptcy by dismissing their lawsuit and suing in state court instead.”93

That is not how it works. Bankruptcy courts do not declare the value or merits of the victims’ claims. Rather, they issue injunctions requiring that victims pursue their claims against settlement trusts. Those trusts have administrators who make determinations about the claims brought to them. If the individual claimants disagree with the liability and damages determination made by the fund administrators, they retain the right to litigate the matter in the tort system against the settlement trust long after the bankruptcy is over. For example, under the Boy Scouts bankruptcy settlement, any claimant has the right to opt out of the administrator’s procedures and have the value of their claim determined by “a court of competent jurisdiction.94 The same is true in the Purdue settlement95 and the Mallinckrodt settlement.96

Thus, after the bankruptcy process has concluded, the victims have the unequivocal right to opt out of the administrative process and litigate the merits of liability and damages in a state court. It is worth emphasizing this point one more time because so many critics get it wrong: Victims who want to litigate the amount of their claim before a jury in the tort system retain the right to do so after a bankruptcy settlement. There is simply no need to opt out of bankruptcy in order to get a jury trial in state court. Similarly, the settlement procedures for claims administration and opt-out trials refute the GBZ claim that bankruptcy plans “distribute resources without testing claims’ merits or finding liability.”97

GBZ do not explain how the settlement funds that result from MDL proceedings test the merits of claims and findings of liability. Importantly, those agreements utilize similar administrative procedures as bankruptcy, but without the option to go to trial.98 While GBZ are concerned that in bankruptcy “low-value claims may get overcompensated, while higher-value claims may be underpaid,”99 they do not explain how MDL settlement funds avoid this problem any better than bankruptcy settlement funds.

C. Bankruptcy Protects Voice

Other bankruptcy provisions empower plaintiffs to represent their own interests in a variety of ways. These participatory protections can be understood to embrace a vision of democratic participation that, in our view, partially vindicates plaintiffs’ dignitary interests. Troy McKenzie has observed that these procedural requirements offer a unique means of vindicating plaintiffs’ dignitary and democratic interests in actively pursuing their tort claims, albeit one based on a different mode of participatory governance than the civil-litigation system:

The class action starts with an assumption that individual claimants will be brought to a collective resolution only on the strictly limited terms of formal procedural rules but, once within the collective, have little voice in it. Bankruptcy, by contrast, starts with an assumption that collective resolution is necessary, but then tempers the emphasis on the collective with group and individual consent and with institutional structures that prevent the excessive accretion of power by lawyers or particular subgroups of claimants.100

We address the various protections in the categories of voting, the opportunity to be heard, and the right to dissent and appeal.

1. Voting

By empowering plaintiffs to participate democratically in ongoing negotiations, bankruptcy allows plaintiffs, subject to voting rules, to advocate on their own behalves and balance competing financial and dignitary values.

As a threshold matter, nonplaintiff classes cannot force plaintiffs to accept a plan of reorganization unless a supermajority of voting plaintiffs approve the plan. The settlement plans in mass-tort cases are voluntary settlements approved by a vote of the class of tort victims. While GBZ assert that voting rules allow for “the ability of non-tort creditors to approve the reorganization without trial or pretrial process,” they do not explain what they have in mind. This outcome is strictly prohibited for asbestos settlements under Section 524(g).101 It is also strictly impossible in the most controversial mass-tort cases, those involving the Texas Two-Step (Two-Steps).

Like most critics, GBZ malign Two-Steps as a maneuver to “shed mass-tort liability” and produce a “shift in leverage.”102 What they fail to observe is that Two-Steps add value by simplifying the bankruptcy process and excluding non-tort creditors from doing exactly the thing that GBZ are worried about: interfering with the rights of tort victims. As we explained in our prior article,

[The Two-Step] blocks nontort creditors from extracting value by inserting themselves in the bankruptcy proceedings. The divisional merger is thus in the interest of tort claimants because it increases their relative leverage and protects them from the risk that other creditors will extract concessions.103

In other cases, an outcome in which a group of non-tort creditors forces a settlement on tort creditors would require one of two exceedingly rare things to happen: 1) the debtor creates a class of creditors that mixes tort and non-tort claims together and then the non-tort claims control the vote in that class; or 2) the court approves a plan of reorganization over the objection of an entire class of tort claimants.

The first scenario is a straw man. The Bankruptcy Code requires that claims must be “substantially similar” to be in the same class.104 It also provides voting rules requiring at least a majority in number of claims and two-thirds in value for acceptance,105 and most courts require a supermajority consistent with Section 524(g). In the cases we have been discussing, the mass-tort claimants count in the tens or hundreds of thousands. What other groups of creditors would overwhelm the vote of the opioid victims in Purdue, the abuse victims in Boy Scouts, or the ovarian cancer victims in LTL? Even if a court allowed the debtor to put mass-tort claimants in a class with non-tort creditors, the effect would be to silence non-tort creditors.

The second scenario would require the invocation of 11 U.S.C. § 1129(b), also known as the cramdown provision. Cramdown allows a debtor to approve a plan over the objection of one class of creditors. Again, this is strictly prohibited for asbestos settlements under Section 524(g) and strictly impossible in a Texas Two-Step. It is also prohibited—by 28 U.S.C. § 157(b)—for personal injury or wrongful death torts where the debtor is disputing liability or disagrees with the class of victims on the question of damages. As a result, a solvent debtor could never cramdown a class of personal injury or wrongful death torts for any amount less than what the class was willing to accept.

So, what is the scenario that worries GBZ? It is presumably one in which an insolvent debtor is providing a plan that retains no value for equity, and where there is no dispute over liability or total damages. In such cases, the debtor might propose a plan that distributes value among various classes of creditors. If the class of victims objected to the distribution—likely because they thought some asset of the debtor was being valued incorrectly—that class of victims might have their objection overruled and be crammed down under § 1129(b). To get to that outcome, § 1129(b) would still require a finding that the plan was “fair and equitable,”106 did not discriminate against the dissenting victims,107 and provided each victim more than they would receive in a liquidation.108 That is the one situation in which non-tort creditors might force a settlement on tort creditors. And note that to do so, the bankruptcy judge must independently find that tort creditors are not worse off than they would be if the firm liquidated.

This scenario does not describe any of the recent mass-tort bankruptcies that have garnered so much attention.109 This is true in large part because bankruptcy courts have been especially solicitous about the procedural protections tort plaintiffs should be afforded. They have thus required class approval for settlements that channel future claims to a settlement trust and have typically required that plans not be approved unless supermajorities consisting of at least seventy-five percent of tort claimants vote to approve the plan. On top of that, the debtor must show that the dissenting creditors are likely to receive a payment that is at least equal in value to what they would get in the absence of a settlement.110

2. Opportunity to Be Heard

There are additional procedural protections available to mass-tort claimants in bankruptcy. While a supermajority of plaintiffs can bind a minority, that does not take away from the fact that plaintiffs are able to influence the direction of any settlement that emerges from the bankruptcy process by demanding more disclosure, objecting to the terms of the settlement, or even pushing for unorthodox remedies. In fact, bankruptcy affords the broadest opportunity for claimants to be heard of any federal proceeding. Indeed, Section 1109 of the Code provides that any “party in interest” can “be heard on any issue in a case under this chapter.”111

This provision allows the victims to be an integral part of negotiations and bring issues to the court when necessary. As Frederick Tung has observed:

The formal rules alone do not capture the dynamics of plan negotiation. The rules merely provide leverage points for the various parties in interest. To a great extent, the negotiating skill of each party and its ability to use its leverage in Chapter 11 determine the consideration it ultimately receives under the plan. The terms of reorganization are set by the aggregate outcomes of the multiple negotiations.112

Finally, while the bankruptcy system was not specifically designed to allow plaintiffs to confront defendants, bankruptcy courts have worked to vindicate victims’ noneconomic interests. In Purdue’s bankruptcy, for example, Judge Drain required that plaintiffs be allowed to confront the Sackler family.113

3. Right to Dissent and Appeal

Another important feature of bankruptcy law is that dissenting tort claimants can object to and appeal the group settlement in bankruptcy without giving up their right to participate in the settlement.114 This is a key feature of aggregation that does not exist in MDL or in any private litigation settlement. In these nonbankruptcy fora, victims are faced with a coercive choice: accept the settlement quietly or risk being left out of the group settlement.

Consider a case where the deal on the table is second best. It is worse for plaintiffs than an alternative that they could negotiate for but better than no deal. In bankruptcy, the dissenting victims can object. If they win, they get the good deal. If they lose, they get the second-best deal. In MDL, dissenters get no deal. For example, any victim who voted against, objected to, and appealed the Purdue settlement is still entitled to share in the settlement fund. Currently in Purdue, the only remaining objectors are one individual and several Canadian municipalities.115 If the Supreme Court affirms the settlement, they will participate fully. Now imagine a dissenting plaintiff in the 3M earplug case. That case settled in MDL. Any plaintiff who rejects the deal, has rejected the deal. Full stop. They might try to appeal some aspect of the settlement process, but they are not entitled to wiggle back into the settlement they rejected. This creates a classic collective-action problem that is known to lead parties to accept suboptimal coercive deals.

But it gets worse. In the MDL context, lawyers—seeking global peace and aggregation—have taken to including settlement provisions that require plaintiffs’ lawyers to abandon any client who rejects the settlement offer.116 How these provisions are legal and consistent with any notion of legal ethics117 is beyond us.118 Bankruptcy, on the other hand, allows the victims to vote on the settlement offer while preserving their right to object and appeal without risking abandonment by their lawyers and other co-plaintiffs. Of course, our goal is not to adjudicate the relative merits of bankruptcy and MDL. We simply mean to point out that bankruptcy affords procedural protections that further noneconomic goals, and that it is especially unwise to dismiss bankruptcy if it is the least imperfect option available under current law.

D. Discovery

Nor is it clear that bankruptcy is a vehicle for covering up wrongdoing and avoiding potentially harmful discovery. While the initial disclosure statement must simply list assets, liabilities, and business affairs, that is not the end of the story. The disclosure statement also must include “adequate information” regarding the debtor’s affairs to enable claimants to make an informed decision about whether to vote to approve a plan of reorganization.119 In mass-tort bankruptcies, initial disclosures have typically included significant information about the activities that led to the tort suits. More importantly, plaintiffs in mass-tort bankruptcies have insisted on substantial additional disclosure before voting to approve plans.120

Compare, for example, the information that came out during the Purdue bankruptcy with the information produced by the Oklahoma bench trial121that GBZ cite as an example of the value available from piecemeal litigation.122 In Purdue, without a single case going to trial, the company was forced to disclose extensive information about its production, and more than two-dozen opioid victims were given the opportunity to make impact statements.123 In Oklahoma, after a thirty-three day trial characterizing Johnson & Johnson as “the kingpin” of the opioid epidemic in America,124 the appellate court reversed the trial court’s $465 million verdict, noting that, “Evidence at trial demonstrated that J&J sold only 3% of all prescription opioids statewide; other pharmaceutical companies were responsible for marketing and selling 97% of the prescription opioids.”125 More importantly, during those thirty-three days, it appears that only five impact victims testified, one of whom had taken a Johnson & Johnson manufactured drug.126

GBZ argue that the extensive discovery in Purdue is attributable not to bankruptcy but to the fact that Purdue “participated in the MDL for over a year and a half before filing for bankruptcy.”127 But this characterization is not correct. The relevant discovery in Purdue was due to bankruptcy, not to MDL. Nor is it correct, that bankruptcy cuts off discovery that would otherwise be available in litigation. The Bankruptcy Code authorizes broad and wide-ranging discovery. The Federal Rules of Bankruptcy Procedure allow any party in interest to request a “2004 Examination.”128 Such examinations go beyond conventional discovery and have been recognized as being “broad and unfettered and in the nature of fishing expeditions.”129 Several orders approving 2004 Examinations, as well as stipulations agreeing to discovery requests can be found on the Purdue docket.130 Just one discovery stipulation included massive document productions from the following individuals:

· Mortimer D.A. Sackler
· Ilene Sackler
· Kathe Sackler
· Theresa Sackler
· Samantha Hunt
· Marissa Sackler
· Sophie Dalrymple
· Michael Sackler
· Karen Lefcourt Taylor
· Jeffrey Lefcourt
· Susan Shack Sackler
· Jaqueline Sackler131

According to the judge in the case, the total bankruptcy discovery included the production of “approximately ten million documents . . . comprising almost 100 million pages.”132

E. Bankruptcy’s Public-Regarding Protections

In addition to protecting individual rights and encouraging individuals to advocate on their own behalves through voting and negotiated settlement, bankruptcy law protects public-regarding values in ways not found in the tort system. The U.S. Trustee—the bankruptcy “watchdog” charged with representing the broad public interest—participates in every case and may also be heard on “any issue in any case.”133 The Trustee is a component of the Department of Justice “whose mission is to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders—debtors, creditors, and the public.”134 As Lyndsey D. Simon has pointed out, this model of “guardian trustees” protects the general public interest.135

Purdue Pharma’s bankruptcy provides an example of this public-regarding guardian role of the Trustee. Issues at the core of the mass-tort bankruptcy debate are now before the Supreme Court despite the fact that not a single tort claimant or creditor sought review. One might disagree with the Trustee’s position in Purdue.136 But it is undeniable that the question is only being heard because of bankruptcy’s unique procedural protections. Were this a nonbankruptcy settlement—like the one in the 3M earplug litigation—there would be no U.S. Trustee and no public-facing appeal.137 The U.S. Trustee’s role in Purdue is consistent with its role in all bankruptcies. As Simon has explained:

The U.S. Trustee is involved in every part of this process, and may interact with and impact the action of every party involved in the proceeding. Among other things, the U.S. Trustee reviews the debtor’s petition and required disclosures, solicits and selects members of the creditors’ committee, and ensures that all pleadings and actions in the case comply with the Bankruptcy Code. Simply put, the U.S. Trustee is a fixture of the bankruptcy process.138

Similarly, the Bankruptcy Code provides for the appointment of an Examiner “on request of a party in interest or the United States trustee.”139 Examiners are neutral parties with broad authority to investigate “any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor.”140 Examiners can serve a major role in uncovering prior misconduct and serving the public-regarding values for which GBZ advocate. Moreover, at least in the Third Circuit, the appointment of an examiner is mandatory upon the request of any party in interest for debtors with debts that exceed $5,000,000.141

F. Bankruptcy’s Equitable Protections

In some respects, aggregation invariably limits plaintiffs’ voice and control. Plaintiffs have less ability to choose their venue in bankruptcy than they do in nonbankruptcy litigation. Opting out is more complicated, and it is not possible for every plaintiff to confront the defendant. In other respects, though, bankruptcy affords a more equitable distribution of due-process values among different plaintiffs. As mentioned, plaintiffs in Purdue were able to directly confront the Sackler family. Imagine an alternative proceeding in which plaintiffs sued Purdue in a piecemeal process. If that were to happen, plaintiffs with sophisticated attorneys or sympathetic juries or whose injuries manifested quickly might receive extremely large payouts. Not only would other plaintiffs receive nothing, but the promise of procedural intervention rings hollow since plaintiffs cannot confront a firm that has liquidated. For future claimants, although they can only participate in a bankruptcy vicariously through a representative, that is of greater value to them than cutting off those protections, which might eliminate their voice and their economic recoveries.

Bankruptcy also stops the race to the courthouse. While we previously defended this feature on efficiency grounds,142 it also promotes due-process values. If a few plaintiffs win large judgments, a debtor’s insolvency will prevent any future plaintiff from recovering money and confronting the defendant. One might question whether certain firms are in fact in financial distress, but the reality is many recent bankruptcies were filed by firms that were in a precarious financial position because the onslaught of state and federal litigation in separate proceedings was costing the firm millions of dollars in legal fees a day, not to mention the multi-billion-dollar jury verdicts.143 Allowing a race to the courthouse against financially distressed firms puts at risk all of the noneconomic values that litigation might provide for future claimants. If there is no company and no settlement fund, there is no litigation, no money, and no public-regarding value to be preserved.

These examples suggest that aggregation is itself helpful in promoting certain noneconomic values. By aggregating claims, bankruptcy ensures that every plaintiff participates in the resolution on equal terms. While the plaintiffs in Purdue had only a limited ability to confront the Sacklers, and while the apology the Sackler family issued is no substitute for an adversarial proceeding in a nonbankruptcy court, the compulsory features of the bankruptcy process ensured that every plaintiff was able to participate. The same cannot be said of disaggregated tort litigation, nor even of the MDL system.

III. potential reforms

The protections just discussed are not perfect. In the end, any collective proceeding will, to some extent, reduce the ability of plaintiffs to express themselves, curtail the development of state law, and reduce redundancy. For example, because the bankruptcy process binds future tort claimants, it obviously prevents them from having their literal day in court. But the alternative risk, as Troy McKenzie has pointed out, is the risk that “[p]resent tort claimants, who have already manifested injuries, may exhaust the resources available for compensation well before future claimants later manifest injuries.”144

Bankruptcy, like all aggregate proceedings, also limits redundancy. While we have explained that bankruptcy judges can and sometimes must refer cases to nonbankruptcy courts, redundancy—taken to the extreme—is inconsistent with aggregation. If every claim has to be litigated before a jury, or if every holdout has a veto, then settlement becomes impossible. One could take a deontological view and say that every single plaintiff is entitled to their day in court.145 Such an argument is extreme, and it is preferable to give all claimants some recovery and some right to participate at the expense of giving a small number of claimants the right to veto all settlements and demand a separate process.

A. Bankruptcy Reforms

Still, despite our support of bankruptcy as a means of resolving mass-tort cases, we do not claim that it is perfect. We have previously written about the possibility of substantive law reforms to improve tort claimants’ position in and out of bankruptcy.146 We also explored more radical possibilities that include “eliminating the debtor in possession’s exclusive right to propose a plan of reorganization, appointing independent board members whose job is to represent tort claimants, and [most radically] replacing the existing board and management with a trustee or other custodian.”147 These reforms could improve plaintiffs’ leverage in negotiating settlements, though they also come with significant costs.148 Here, we discuss a few additional reforms that could make bankruptcy more effective in promoting the noneconomic benefits of litigation.

Before we do, however, it is worth discussing one feature of bankruptcy where we are skeptical that radical reforms would be beneficial. One difference between bankruptcy and MDL is that in bankruptcy, debtors can typically determine where to file. For years, scholars have argued that this encourages debtor opportunism,149 though Jared A. Ellias has shown that debtors primarily seek predictability and judicial expertise.150 In our view, there are reasons to think that venue shopping in bankruptcy serves desirable ends, and there are reasons to think it can be abused.151 As a result, we favor reforms that would preserve socially valuable venue shopping. To the extent debtors look for judges who are unsympathetic to tort claimants, we think that venue is not the appropriate means of addressing this problem. Instead, policymakers should enact substantive reforms to bankruptcy and nonbankruptcy law while ensuring meaningful opportunity to appeal adverse judgments through a robust appeals process.152

Setting aside these procedural issues, substantive reforms could allow bankruptcy to better vindicate noneconomic values. One problem with current voting rules is that bankruptcy judges often allow claimants with weak claims to have an outsized influence while weakening the input of plaintiffs with strong claims. Bankruptcy judges often, though not always, estimate that every tort claim is worth one dollar for voting purposes.153 Because tort claimants are in their own class, this does not harm them compared to financial creditors. The plan will only be approved if a supermajority of tort claimants votes for the plan.154 The value given to tort claims does, however, mean that plaintiffs with weak claims have more influence than they should.155 A plan can only be approved if two-thirds in dollar amount vote for the plan. Because weak claims are often estimated at the same dollar value for voting purposes, their votes are weighed more heavily than they should be. As a result, one should expect settlements to be skewed. To the extent claims are separable—for example when a product causes different types of injuries—the claimants can be placed in different voting classes.156 The difficulty is when the injury type is the same, but the severity is not yet known.

The decision to estimate all plaintiffs’ claims the same—regardless of the merits of their case—is problematic. While it is common, it is likely insufficient to meet the Code’s requirement that courts estimate claims. Ideally, judges would develop a uniform and robust claims-estimation process. Alternatively, Congress should amend the Code to provide more guidance on claims estimation. Congress or courts could even innovate with alternative mechanisms for creating classes. Perhaps victims could be placed into various voting classes, and a supermajority vote of each class could be required to approve a settlement plan. With appropriate rules allowing victims to object to classification based on the strength of their claims, such a system might alleviate the voting-estimation problem.

Another potential problem with the existing process is that the future claims representative may not have an adequate incentive to advocate on behalf of clients. Future claims representatives are appointed by the court. They are supposed to act as a fiduciary for claimants who are unable to represent themselves. According to some commentators, however, future claims representatives’ real interest lies in appeasing the judge, since doing so increases the likelihood that they will be appointed in future cases.157 If that is correct, then future claims representatives may be more inclined to support whatever outcomes the judge prefers. For example, they may think the judge prefers a smooth resolution to reduce demands on her time. If bankruptcy judges are not neutral for any reason, it may be preferable to have a neutral third party such as the district judge or U.S. Trustee appoint the claims representative without input from the bankruptcy judge.

Conclusion

There is considerable irony in modern critiques of the bankruptcy system. In the mid-1990s and early 2000s, academics were critical of Supreme Court decisions that made it difficult to aggregate mass-tort claims in class actions.158 Scholars were particularly concerned that, without a central proceeding to consolidate claims and bind holdouts, plaintiff recoveries would decline, and future claimants would be unable to exercise their due-process rights.159 In other words, scholars recognized that aggregation was necessary to ensure a fair process and secure global peace.160

Now that bankruptcy offers the precise tools for which scholars advocated in the civil-litigation context more than twenty years ago, the new concern is that it allows for too much aggregation. Interestingly, the more persuasive critiques of modern bankruptcy practices—for example, that valuation is difficult and uncertain, that future claims representatives may not adequately represent their clients, and that aggregation reduces plaintiff voice—are problems that must be managed in every type of aggregation. Bankruptcy, however, has a forty-year head start—as compared to some hypothetical aggregation process by another name—in working through these problems. It is the only procedure currently available for binding future claimants. It also provides the most robust and protective mechanism for reaching consensus and binding minority holdouts after a vote, while still ensuring them an opportunity to be heard. In contrast, MDL is widely known and criticized for using coercive terms to force dissenting claimants to join settlements.161 Most egregiously, lawyers promise to cease representing any of their existing clients who turn down the settlement.162 It seems clear to us that bankruptcy’s coercion—a voting regime with judicial oversight, and a guarantee of payment that is no worse than the nonbankruptcy alternative—is far superior to a collusive agreement among lawyers to abandon their clients. It may not get the balance exactly right, but academics and policymakers should start by tweaking the system we have, not by blowing it up entirely.

The reforms we discuss are just some of the options that could improve the procedural and public-regarding values in bankruptcy. We do not present an exhaustive list. Rather, our main point is to show that small reforms are on the table and could go a long way. In fact, one lesson from the MDL agreements is that lawyers will find ways to aggregate claims to reach global settlement. They always have.163 But bankruptcy provides aggregation with the least cost and the most robust protections for procedural and public-regarding values. We can improve on it to further those goals. Alternatively, we could start anew and design a system with robust discovery, procedural protections, mechanisms to force information disclosure, strict voting rights, and the option to refer bellwether cases to trial when necessary. We could then appoint a neutral administrative officer to supervise it and have their final approval subject to further judicial oversight. That would be a great system. And you might call it all kinds of things. But we call it bankruptcy.

Anthony J. Casey is the Donald M. Ephraim Professor of Law and Economics and the Faculty Director of the Center on Law and Finance at the University of Chicago Law School. Joshua C. Macey is Assistant Professor of Law at the University of Chicago Law School. The authors thank Carrie Boone, Benedict Bolton, Abby Mendenhall, Emilie Miner, and Emma Xu for excellent research assistance. The Richard Weil Faculty Research Fund and the Paul H. Leffmann Fund also provided generous support.