Mandatory Aggregation of Mass Tort Litigation in Bankruptcy
A Response To
abstract. This Response to Bankruptcy Grifters by Lindsey Simon shares her concerns about the inequities of a solvent entity, which has not filed bankruptcy, discharging its mass tort liability in the bankruptcy proceedings of a codefendant. Such a nondebtor discharge, effectuated through a so-called nondebtor release and channeling injunction, imposes upon tort victims a mandatory non-opt-out settlement of the released nondebtor’s mass tort liability. Simon’s proposed reforms of nondebtor-release practice do not go far enough. Nondebtor releases are an illegitimate and unconstitutional exercise of substantive lawmaking powers by the federal courts. Moreover, the bankruptcy “necessity” proffered as justifying a mandatory settlement of nondebtors’ mass tort liability—a mandatory settlement that is otherwise impermissible and unconstitutional—is nothing more than pretext. The Supreme Court should resolve the circuit split over the permissibility of nondebtor releases by flatly repudiating them. Bankruptcy can serve as a powerful aggregation process for efficient (and fair) resolution of the mass tort liability of both debtors and nondebtor codefendants even (and especially) without nondebtor releases, particularly if the Supreme Court also clarifies the full expanse of federal bankruptcy jurisdiction.
Introduction
Professor Lindsey Simon’s fascinating and revealing article, Bankruptcy Grifters,1 comes in the midst of a collective epiphany regarding the astonishing means by which federal bankruptcy courts impose mandatory settlements of mass tort liabilities. Of course, with respect to an insolvent debtor’s liability, such a power has always been incident to collective insolvency proceedings, even before the enactment of the current Bankruptcy Code.2 What is remarkable (and profoundly disturbing) about the bankruptcy grifter phenomenon Simon documents, however, is that bankruptcy courts have, entirely at their own behest, invented the immense, extraordinary power to impose mandatory non-opt-out settlements of mass tort victims’ claims against eminently solvent nondebtors, who have not filed bankruptcy themselves.
I wholeheartedly share Simon’s concerns regarding the inequities the bankruptcy grifter phenomenon has wrought. Indeed, I predicted as much twenty-five years ago,3 in the wake of the first big bankruptcy grift involving the Dalkon Shield contraceptive device manufactured by A.H. Robins. Those who succeeded in discharging their liability exposure in the Robins bankruptcy case included a long list of alleged joint tortfeasors: Robins’s insurer (Aetna), members of the Robins family, and other officers, directors, employees, and attorneys for Robins. Personal injury claimants asserted that Robins and Aetna affirmatively concealed from the public the dangers of the Dalkon Shield and that individual actors personally participated in defrauding the public through the marketing of the Dalkon Shield.4
The pending Purdue Pharma bankruptcy, implicating the Sackler family’s personal responsibility for the ravages of the opioid OxyContin,5 initially unfolded as essentially a replay of the A.H. Robins case. But the Robins bankruptcy grift went largely unnoticed, except in the insulated community of bankruptcy professionals, who aggressively exploited the precedent, fueling the proliferating and rapidly accelerating system of bankruptcy grifting.6 The prospect of liability releases for the Sacklers in the Purdue Pharma case, however, finally awakened a wider realization, even and perhaps particularly among the general public,7 with all of the shock, disbelief, and outrage that bankruptcy grifting should have elicited from its infancy.8
While I agree with Simon that bankruptcy grifting is a momentous, pressing problem, I disagree with her regarding the appropriate response. Simon seems resigned to the inevitability of the highly controversial practice that makes bankruptcy grifting possible: so-called nonconsensual nondebtor (or third-party) “releases,” which extinguish creditors’ claims against a nondebtor without the consent (and even over the objection) of creditors9 in the same way that a bankruptcy discharge extinguishes a bankruptcy debtor’s debts.10 Such nondebtor-release provisions most frequently appear in the terms of a Chapter 11 debtor’s plan of reorganization. And in confirming a plan containing such a nondebtor-release provision, the court will typically enter an order permanently enjoining assertion of the released claims (now commonly known as a “channeling” injunction11), replicating the effect of the Bankruptcy Code’s statutory discharge injunction (which is, of course, applicable to only the debtor’s discharged debts).12
Unlike Simon, I do not believe that we should simply abandon what she recognizes as an “obvious solution”13 to the bankruptcy grifter problem: prohibiting nonconsensual nondebtor releases.14 As Simon points out, the ever-larger waves of bankruptcy grifting and the degree to which grifting disadvantages claimants is a significant and urgent problem, one that I believe warrants the attention of the Supreme Court. Indeed, there is a prominent, longstanding circuit split over the propriety of nondebtor releases that begs for resolution.15 Moreover, nondebtor releases pose much larger questions than the typical statutory-interpretation disputes that comprise the bulk of the Supreme Court’s bankruptcy jurisprudence. As I explain in Part I of this Response, the fundamental illegitimacy of nondebtor releases is of a constitutional magnitude, implicating constraints imposed by the separation-of-powers dimensions of both the Bankruptcy Clause and Erie’s constitutional holding.
Moreover, the process by which bankruptcy courts approve nondebtor releases departs dramatically from the baseline requirements for resolving disputed nonbankruptcy claims and causes of action, in ways that raise serious due-process concerns. Giving bankruptcy courts the unique power to impose mandatory non-opt-out settlements of tort victims’ claims against nondebtors—settlements that are otherwise impermissible and unconstitutional—requires an explanation of why this extraordinary settlement power with respect to claims against a solvent nondebtor should exist only when a codefendant happens to be a bankruptcy debtor. But as I discuss in Part II, the only proffered justification is nothing more than empty, false rhetoric—what I dub bankruptcy’s “necessity” fiction. Nondebtor releases do not advance any legitimate bankruptcy policy; they simply provide a contrived means for solvent nondebtors to impose extraordinary mandatory settlements of their mass tort liabilities upon nonconsenting victims.
Efficient (and fair) joint settlements of both debtors’ and nondebtors’ mass tort liability will still be possible, even (and particularly) if nonconsensual nondebtor releases are prohibited. As Part III demonstrates, the essential architecture for facilitating powerful aggregation and corresponding settlement of tort victims’ claims against nondebtors already exists in the bankruptcy jurisdiction, removal, and venue provisions of the Judicial Code. And a much-needed rationalization of the scope of federal bankruptcy jurisdiction would unleash bankruptcy’s full aggregation potential.
As a practical and institutional matter, the Supreme Court is the one body that can (relatively quickly and within the confines of existing law) both end the disturbing bankruptcy grifting we are now witnessing and preserve bankruptcy as a viable forum for comprehensive, efficient, and fair resolutions of nondebtors’ mass tort liability. Accordingly, my response to the troubling rise in bankruptcy grifting, in Part IV, is a plea for action by the Supreme Court.
I. the illegitimacy and unconstitutionality of nondebtor releases
One of the principal justifications courts rely upon to
approve a nonconsensual nondebtor release—one of the
so-called Master Mortgage16 or Dow Corning factors17—is
that the released “non-debtor has contributed substantial assets to the
reorganization.”18 Nothing in the Bankruptcy
Code expressly authorizes a “release” or discharge of a nondebtor’s
liability on this basis (or any other).19 Nonetheless, such power purportedly
flows from bankruptcy courts’ general equitable powers under § 105(a) of
the Bankruptcy Code.20
But such a judicially designed discharge of debt is an unconstitutional
judicial usurpation of a quintessential legislative function, as revealed by
both Erie’s constitutional holding
and the Bankruptcy Clause itself.
Since Congress does have the power to explicitly provide for discharge of the obligations of a nondebtor, it is common to analyze the legality of nonconsensual nondebtor releases strictly as a matter of statutory interpretation, setting aside any consideration of constitutional issues.21 However, that approach is incomplete, even as a matter of statutory interpretation, because fundamental principles of constitutional structure guide and inform the appropriate construction of the Bankruptcy Code. The separation-of-powers implications of Erie and the Bankruptcy Clause provide substantive constitutional canons of statutory interpretation that cogently elucidate why nothing in the Bankruptcy Code can plausibly be read to authorize nonconsensual nondebtor releases.
A. Erie’s Constitutional Imperative
A revealing manner of framing Erie’s relevance to nondebtor releases is
to consider practice before enactment of the Bankruptcy Code in 1978. The
Supreme Court has repeatedly emphasized that it “will not read the Bankruptcy
Code to erode past bankruptcy practice absent a clear indication that Congress
intended such a
departure.”22
The predecessor Bankruptcy Act of 189823 contained a provision virtually identical to Code § 105(a),24 and the 1898 Act cases uniformly held that this provision did not authorize nonconsensual nondebtor discharge provisions.25 Likewise, the Supreme Court held that bankruptcy courts’ equitable injunctive powers did not authorize a nonconsensual nondebtor release via permanent injunction in Callaway v. Benton.26 The 1898 Act gave the courts no such substantive discharge power. Moreover, there is nothing in the current Bankruptcy Code or its legislative history to indicate any intention of overturning the 1898 Act practice prohibiting nondebtor discharges and permanent nondebtor injunctions.
The only remotely relevant statutory change in 1978, with enactment of the Bankruptcy Code, was an enlargement of federal bankruptcy jurisdiction to reach all proceedings “related to” a debtor’s bankruptcy case.27 That provision, quite purposefully, expanded the reach of federal bankruptcy jurisdiction to encompass a broad range of third-party claims and causes of action—that is, claims that are asserted neither by nor against the debtor’s bankruptcy estate, but that are nonetheless sufficiently “related to” the debtor’s bankruptcy case.28 That grant of third-party “related to” jurisdiction is what convinced bankruptcy courts that they now have the power (that did not exist before 1978) to enjoin the assertion of creditors’ claims against a nondebtor.29 In fact, in approving nondebtor releases, most courts simply collapse the “related to” jurisdictional inquiry into their analyses regarding whether a release should be approved because “[t]here is an identity of interest between the debtor and the third party . . . such that a suit against the non-debtor is, in essence, a suit against the debtor”30 or—according to the most crucial of the Master Mortgage or Dow Corning factors—the release is “necessary” or “essential” to the debtor’s reorganization.31
As the Supreme Court recognized in Callaway v. Benton,32 though, a bankruptcy jurisdiction statute, in and of itself, cannot supply grounds for substantive discharge relief.33 The right to such substantive relief must exist independent of the jurisdictional grant via the express terms of the bankruptcy statute. To derive the substantive power to discharge debts (which are usually obligations grounded in state law) from the “related to” jurisdictional grant runs afoul of Erie.34 Indeed, Erie is a pervasive presence in bankruptcy, where it typically travels incognito under the rubric of the Butner doctrine,35 pursuant to which “state law governs the substance” of parties’ rights and obligations in bankruptcy proceedings.36
The Erie decision—in its constitutional holding, construction of the Rules of Decision Act, and broader policy penumbra—is not limited to diversity cases.37 While the suggestion to the contrary is an “oft-encountered heresy,”38 “the Erie doctrine applies, whatever the ground for federal jurisdiction, to any issue or claim which has its source in state law.”39 Consequently, Erie is particularly important in federal bankruptcy proceedings.40
Indeed, by its very nature, bankruptcy “law” is more procedural than substantive.41 As I have noted before,
[B]ankruptcy ‘law,’ for the most part, functions not to create distinct federal grounds for recovery or relief, but to create an alternative means for enforcing existing substantive rights, most of which are grounded in state law. . . . Thus, . . . congressional power to enact uniform national bankruptcy ‘laws’ necessarily, and even primarily, envisions the power to place adjudication of all disputes incident to administering bankruptcy estates in federal court.42
The Supreme Court’s famous reasoning in the bankruptcy case Butner v. United States, therefore, was simply an unattributed expression of the Erie doctrine:
Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving “a windfall merely by reason of the happenstance of bankruptcy.”43
Moreover, the Butner Court made clear that those “justifications for application of state law” in bankruptcy proceedings “are not limited to ownership interests.”44 And those justifications precisely replicate “the twin aims of the Erie rule: discouragement of forum-shopping and avoidance of inequitable administration of the laws” in the sense “that it would be unfair for the character or result of a litigation materially to differ because the suit had been brought in federal court.”45
Erie is grounded in two synergistic principles of constitutional structure: federalism and separation of powers. Likewise, Butner’s instantiation of Erie in bankruptcy also fortifies those same two cornerstones of our constitutional system, which illuminate the unconstitutionality of nondebtor releases.
1. Federalism
The twin aims of Erie flow from “the policy that underlies Erie,” which is vitally “important to our federalism.”46 Indeed, it seems that an implicit premise of Erie’s policy reasoning was the federalism impetus that “federal courts . . . must respect the definition of state-created rights and obligations.”47 The Erie/Butner doctrine in bankruptcy—that all parties’ rights and obligations must be governed by state law in the absence of countervailing federal bankruptcy law—is likewise animated by overt federalism sensitivities.48 And wholesale extinguishment of creditors’ state-law rights against nondebtors via nonconsensual liability releases is obviously troubling from a federalism perspective.49 But those federalism concerns play only a subsidiary, supporting role in pinpointing the unconstitutionality of nondebtor releases under Erie.
Erie’s constitutional holding is multifaceted and the full extent of its applicability in bankruptcy is uncertain.50 Nonetheless, it unquestionably does have significance for the third-party claims discharged via nondebtor release. The federal courts’ “related to” bankruptcy jurisdiction over third-party claims (such as those discharged via nondebtor releases) is a species of supplemental jurisdiction,51 and claims before a federal court through supplemental jurisdiction are a classic example of a nondiversity context in which Erie’s constitutional holding compels that “state law must govern because there can be no other law.”52 As the Supreme Court has acknowledged, then, for a state-law claim within the federal courts’ “related to” bankruptcy jurisdiction, “[i]t is clear, under Erie R. Co. v. Tompkins, that [state] law governs the substantive elements of [the] claim.”53
That focus on identifying the “substantive rules . . . applicable in a [s]tate”54 for the claim at issue is the standard doctrinal formulation of that which must govern the rights and obligations of the parties in federal court under Erie’s constitutional holding. Wholly extinguishing parties’ state-law rights and obligations via nondebtor release would certainly seem to qualify as “‘substantive’ in every traditional sense.”55 Indeed, in the largely procedural process that comprises bankruptcy, the principal and clearest example of a right to substantive relief afforded by federal bankruptcy law is the right to receive a discharge of one’s obligations. But that “substantive” characterization does not explicate the constitutional provisions and principles at stake in Erie and, in particular, its implications for nondebtor releases.
In its purest constitutional-federalism aspect, Erie “recognized that the scheme of our Constitution envisions an allocation of law-making functions between state and federal legislative processes which is undercut if the federal judiciary can make substantive law affecting state affairs beyond the bounds of congressional legislative powers in this regard.”56 Presumably, though, it is within Congress’s discharge power under the Bankruptcy Clause to expressly authorize discharge of the obligations of even a nondebtor,57 such as Congress has done in § 524(g) of the Bankruptcy Code for certain asbestos claims.58 Moreover, by virtue of implicit field preemption, the states have no debt discharge power.59 Nondebtor releases, therefore, do not exceed the limits of federal lawmaking authority vis-à-vis that of the states.
2. Separation of Powers
The constitutional infirmity of nondebtor releases is most directly attributable to Erie’s constitutional separation-of-powers implications.60 In the bankruptcy context in particular, the Erie/Butner doctrine (in both its policy and constitutional manifestations) is grounded in separation-of-powers principles. The Butner Court itself stated:
The constitutional authority of Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States” would clearly encompass a federal statute defining the [extent of parties’ rights to] property in a bankrupt estate. But Congress has not chosen to exercise its power to fashion any such rule. . . . Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law.61
The corollary of the Erie/Butner separation-of-powers principle is the constraint that it imposes on federal bankruptcy courts’ authority to create substantive federal common law. Indeed, in its recent Rodriguez v. FDIC opinion,62 the Court invoked both Erie and Butner “to underscore the care federal courts should exercise before taking up an invitation to try their hand at common lawmaking,” which hazards “the mistake of moving too quickly past important threshold questions at the heart of our separation of powers.”63 And, of course, separation-of-powers restrictions on federal lawmaking indirectly preserve states’ lawmaking authority (i.e., federalism values).64 Thus, Erie/Butner “is completely consistent with notions of judicial federalism—that is, limits on the lawmaking power of courts that impose no parallel limits on the power of Congress.”65
Moreover, that Erie/Butner limitation on bankruptcy courts’ creation of substantive federal common law is directly incorporated into the Supreme Court’s jurisprudence restraining bankruptcy courts’ equitable powers, as the Butner decision itself made clear: “The equity powers of the bankruptcy court play an important part in the administration of bankrupt estates in countless situations,” but “undefined considerations of equity provide no basis for adoption of a . . . federal rule” giving a party substantive “rights that are not his as a matter of state law,”66 such as the right to a discharge of his debts without filing bankruptcy. Thus, the same constitutional constraint that restricts federal bankruptcy courts’ power to create substantive federal common law for such third-party “related to” claims under Erie and Butner—and in service of the same constitutional values of federalism and separation of powers—provides a constitutional meta-norm67 (or a so-called substantive canon of statutory construction68) that likewise prohibits alteration of the parties’ state-law substantive rights and obligations via the vague equitable-powers provision69 of the Bankruptcy Code.70 Indeed, the Supreme Court’s jurisprudence limiting bankruptcy courts’ equitable powers is a wonderful illustration of Justice Barrett’s conception of how substantive canons of statutory interpretation can properly function as constitutional implementation.71
The federal courts are illicitly creating substantive federal common law through their jurisprudence authorizing nondebtor releases. Indeed, that is apparent from the list of criteria—exclusively the product of judicial imagination—that supposedly trigger bankruptcy courts’ power to grant discharge relief for nondebtors.72 With respect to the third-party nondebtor claims extinguished via nondebtor releases, Erie’s constitutional holding is that the parties’ substantive state-law rights and obligations must be respected in federal bankruptcy proceedings, notwithstanding the grant of “related to” jurisdiction over such claims, in the absence of any explicit congressional authorization of nonconsensual nondebtor releases. Extinguishing the parties’ substantive state-law rights and obligations via mere judicial edict is unconstitutional under Erie. Moreover, such a judicially crafted, federal common-law discharge power is also unconstitutional under the separation-of-powers limitations implicit in the Bankruptcy Clause itself.
B. The Bankruptcy Clause’s Separation of Powers
The Supreme Court famously captured the essence of the constitutional Bankruptcy Power as follows:
[I]t extends to all cases where the law causes to be distributed the property of the debtor among his creditors; this is its least limit. Its greatest is the discharge of a debtor from his contracts. And all intermediate legislation, affecting substance and form, but tending to further the great end of the subject—distribution and discharge—are in the competency and discretion of Congress.73
The “great” discharge power, in particular, provided the impetus for inclusion of the Bankruptcy Clause in the Constitution.74 The power to grant a discharge of indebtedness, however, does not descend from the equity powers of the Lord Chancellor. Bankruptcy discharge has always been a creature of statute.75 Thus, the Constitution explicitly provides that “Congress shall have Power . . . [t]o establish . . . uniform Laws on the subject of Bankruptcies.”76
At the heart of Congress’s Bankruptcy Power is determining the appropriate distribution of someone’s assets that warrants discharge of their obligations.77 But nondebtor-release practice, as evidenced by the judicially divined factors or requisites for approval—including the requirement that a discharged nondebtor “has contributed substantial assets to the reorganization”78—presumes to lodge plenary authority for such a determination in the courts. Therefore, the distribution-discharge scheme effectuated via nondebtor release violates the separation-of-powers principle embedded in the text of the Bankruptcy Clause, which provides for legislative supremacy over matters of distribution and discharge.79
The Supreme Court’s jurisprudence limiting bankruptcy courts’ equitable powers also directly incorporates this structural constitutional bulwark for Congress’s core legislative prerogatives. As the Court has directed, exercise of bankruptcy courts’ equitable powers “must not occur at the level of policy choice at which Congress itself operated in drafting the [Bankruptcy] Code.”80 An exercise of equitable powers “that takes place at the legislative level of consideration” is “tantamount to a legislative act and therefore” is “beyond the scope of judicial authority.”81 The Bankruptcy Clause’s separation-of-powers dimension, therefore, also supplies a nondelegation substantive canon of statutory construction limiting the scope of bankruptcy courts’ equitable powers under § 105(a) of the Bankruptcy Code.82
Moreover, one of the larger systemic implications of the Court’s important decision in Czyzewski v. Jevic Holding Corp.83 is that implicit authority for such legislative-order determinations does not reside in the interstices of other vague Bankruptcy Code authorizations either.84 Discharge of debt is the “greatest” power granted to Congress by the Bankruptcy Clause.85 Hence, a general statutory “necessary and proper” authorization86 “is too weak a reed upon which to rest [delegation of] so weighty a power.”87 As is equally true with the distribution priority issue the Court addressed in Jevic, given that the Bankruptcy Code does not explicitly authorize discharge of a nondebtor’s obligations,88 “such statutory silence should be interpreted as denying bankruptcy courts any power to authorize” such a nondebtor discharge.89
With respect to matters of distribution and discharge, therefore, the nondelegation constitutional canon for interpretation of the Bankruptcy Code is, at a minimum, a “no elephants in mouseholes” canon90 and may even rise to the level of a stronger-form clear-statement rule.91 Regardless of the strength of the presumption associated with the Bankruptcy Clause’s separation-of-powers nondelegation canon, though, nothing in the Bankruptcy Code or the legislative record surrounding its enactment provides even a hint of congressional delegation to the bankruptcy courts of a power to create a common-law distribution and discharge scheme for nondebtors.92
There is no common-law discharge power. Nonconsensual nondebtor releases are an unconstitutional encroachment upon the exclusive “competency and discretion of Congress” concerning discharge of indebtedness.93 Nondebtor releases contravene the constitutional restrictions that both Erie and the Bankruptcy Clause place upon the lawmaking powers of the federal courts.
II. justifying an extraordinary mandatory settlement power only in bankruptcy
As Simon points out, the judicially decreed criteria for approval of nonconsensual nondebtor releases do not replicate the Bankruptcy Code’s substantive and procedural protections for the third-party nondebtor claims being discharged thereby.94 For example, in conjunction with a Chapter 11 debtor’s discharge, each and every creditor has the right to insist that it receive at least as much under the debtor’s plan of reorganization as that creditor would receive in a liquidation of the debtor’s assets.95 Indeed, as Simon discusses,96 if the courts were to impose such a requirement in conjunction with nondebtor releases, particularly for solvent nondebtors, many (if not all) releases could never be approved.97 And for individual nondebtors, releases shield the individual from liability (and, indeed, from even being sued and the accompanying public scrutiny) for alleged fraud and other intentional misconduct,98 which the Bankruptcy Code provides cannot be discharged.99
Equally if not more importantly, though, approval of nondebtor releases also does not replicate nonbankruptcy standards for resolution of disputed claims.100 As the discussion in Section I.A reveals, by simply granting the federal courts “related to” bankruptcy jurisdiction over third-party nondebtor claims, the statutory design (pursuant to Erie) is for those claims to be heard and adjudicated in federal court, if at all, according to applicable nonbankruptcy substantive law and the incident procedural apparatus for adjudicating those claims, such as the Federal Rules of Bankruptcy Procedure (which incorporate nearly all of the Federal Rules of Civil Procedure101). The extraordinary resolution of those claims effected via nondebtor release, however, is unknown to any of those governing sources of substantive or procedural law. And there is no bankruptcy-unique normative or policy justification for nondebtor releases’ exceptional alteration of the parties’ nonbankruptcy rights and obligations.
A. Mandatory Settlement via Nondebtor Release
Nondebtor releases are often clothed in the rhetoric of “compromise” and “settlement” of the third-party nondebtor claims at issue. Given the nonconsensual nature of the nondebtor releases of concern, though, the “settlement” effectuated via nondebtor release departs from the fundamental baseline norm that settlement of a claim cannot be imposed on a party without that party’s consent.102 That principle is undoubtedly borne of constitutional due-process guaranties, as “part of our ‘deep-rooted historic tradition that everyone should have his own day in court.’”103
Nondebtor releases, therefore, work a kind of representational settlement, akin to a class-action settlement, in which someone else is negotiating and compromising creditors’ claims against released nondebtors. As I have noted before, nonconsensual nondebtor releases impose a mandatory non-opt-out settlement of creditors’ third-party nondebtor claims, wholly without regard to whether such a mandatory non-opt-out settlement is appropriate, permissible, or even constitutional.104
The approval process for nondebtor
releases does not adhere to the constitutional due-process requirement of an
adequate unconflicted litigation representative for the third-party nondebtor claims compromised thereby.105 Even more significantly, claimants
are not provided any opportunity to opt out of the “settlement” imposed on them
via nondebtor release.106 In a series of decisions
over the last thirty-five years, the Supreme Court has repeatedly and strongly
suggested, if not explicitly held, that for the kinds of money damages claims
typically compromised via nondebtor release, the “absence
of
. . . opt out violates due process.”107 Within the due-process triad of exit,
loyalty, and voice,108 then, nonconsensual nondebtor releases deny claimants both loyalty and by
definition exit. In addition to their facial unconstitutionality on
separation-of-powers grounds,109
nondebtor releases thus raise grave due process
concerns.110
In her article, Simon expresses no opinion on whether nonconsensual nondebtor releases are permissible or constitutional under existing law. Rather, her acceptance of nondebtor releases is a more practical response to the realities of existing nondebtor-release practice. She proposes salutary reforms, but her proposals would not alter the basic nature of any settlement produced by nonconsensual nondebtor release as a mandatory non-opt-out settlement.111
It is worth reemphasizing the unique and extraordinary nature of these nonconsensual nondebtor release “settlements,” which simply cannot occur in any other context. Why, then, should this extraordinary mandatory settlement power exist only in cases in which a codefendant has filed bankruptcy? After asking and diligently exploring that question for over twenty-five years, I have yet to receive or discover a credible response.
B. Bankruptcy’s “Necessity” Fiction
The truth about nonconsensual nondebtor releases and the mandatory settlements they impose on claimants is that they are a manifestation of a more general deceit indulged throughout the bankruptcy reorganization system, in order to disregard cornerstone principles governing parties’ fundamental distributional entitlements.112 I will call this bankruptcy’s “necessity” fiction. And as Simon’s article starkly demonstrates, bankruptcy’s necessity fiction (via the bankruptcy grifter phenomenon) is now also distorting the tort system.
The bankruptcy reorganization process is extremely complex and, by design, incredibly flexible and fluid. That is its genius. Those who administer the system, particularly judges and lawyers, do so with an earnest and ever-present desire to, whenever possible, preserve the debtor’s business intact and prevent the value destruction, job loss, and other unfortunate collateral consequences that would accompany a fire-sale liquidation.113
However, in many different contexts throughout the bankruptcy reorganization process, parties with significant control over that process seize upon and opportunistically exploit the exigencies surrounding the debtor’s financial difficulties in order to alter various parties’ distribution rights, as expressed in the Bankruptcy Code’s explicit priority and distribution provisions.114 The various judicial doctrines created to approve these priority-altering distribution techniques frequently rely upon the justification (and even required factual findings) that doing so is “important,” “necessary,” or “essential” to the debtor’s successful reorganization and, at least in the earliest stages of the institutionalization of these practices, that the variation is an “exceptional” one that is to be approved in only “rare” circumstances. That is the necessity fiction, which time and eventual institutionalization of these practices expose as little more than a rote incantation of magic words.115
Nonconsensual nondebtor releases
follow the same pattern in altering the fundamental rights of creditors with
respect to their claims against released nondebtors.
As pronounced by the Courts of Appeals, such releases “should be reserved for
those unusual cases in which such an order is necessary for the success of the
reorganization.”116
That standard for approval, however, and the dynamics of the context in which
these releases are bargained for and approved, ensure that nonconsensual nondebtor releases will not
be limited to rare or exceptional cases.
Given the extraordinary nature of the relief at stake and the supposed rarity of its grant, one might legitimately expect that the concept of “necessary to successful reorganization” means reorganization in the sense of saving the debtor’s business from destruction. But that is not what it means, according to the necessity fiction. Consider, for example, the Blitz case (and Walmart’s nondebtor release therein) that Simon discusses,117 which involved liquidation of a defunct business’s assets.118
If successful reorganization does not mean saving the debtor’s business, then all it means is confirming a plan of reorganization, the terms of which are the product of negotiations among the dominant players.119 In practice and as applied, therefore, “necessary to successful reorganization” for purposes of the necessity fiction simply means necessary to do the deal embodied in the plan of reorganization.120 Moreover, given that a successful reorganization is the product of negotiations, nondebtor-release beneficiaries themselves, as key participants in the negotiations, can always manufacture the “evidentiary” record required for approval, merely through their negotiation behavior.
To understand why that is the case, consider the negotiations over a nonconsensual nondebtor release, given in exchange for a nondebtor’s contribution to a settlement fund. In order for a judge to approve the release as “necessary to successful reorganization,” the judge will have to find that the only means of procuring the nondebtor’s contribution to the settlement fund is by giving the nondebtor a nonconsensual liability release.121 Therefore, the negotiation position of the nondebtor is preordained by the operative legal rule. The nondebtor will absolutely insist upon receiving a nonconsensual nondebtor release as an inviolable deal-breaker condition of making any contribution to the settlement fund, and when the resulting release is presented to the bankruptcy court for approval, will enthusiastically testify accordingly. And truthfully so, since the operative legal rule itself turns on a negotiating position. Even the most obvious bluff, on the stand and under oath, does not risk punishable perjury, because the nondebtor is not so much testifying about objectively verifiable past facts as the nondebtor is testifying about its negotiating position: “I will not contribute anything to a settlement without a nonconsensual nondebtor release.”
Permitting the practice of approving nonconsensual nondebtor releases that are “necessary to successful reorganization,” while “preach[ing] caution”122 (as Courts of Appeals have done) is simply extreme naivete—especially if the hope is that this approach will exert any principled restraint on the practice. “Necessary to successful reorganization” is a negotiating position proffered by a nondebtor who will directly benefit from that which it insists is essential to any settlement deal.123 By positively inviting the nondebtor to manufacture the “evidence” necessary for approval, through its negotiating behavior, this standard virtually guarantees that approval will not and cannot be limited to “rare” and “unusual” cases, which the growing prevalence of the bankruptcy grifter phenomenon vividly illustrates.124
As Justice Breyer’s opinion in the Jevic case insightfully observes, in striking down an extra-statutory priority deviation approved on the basis of the necessity fiction, such a standard “will lead to similar claims being made in many, not just a few, cases,” which “threatens to turn a ‘rare case’ exception into a more general rule.”125 “[O]nce the floodgates are opened, [the negotiating parties] can be expected to make every case that ‘rare case.’”126 Indeed, bankruptcy judges are intimately familiar with this “transformation of relief circuit courts describe as ‘extraordinary’ into a routine part of nearly every chapter 11 case.”127
This is not to say that requested nondebtor releases are always approved, but it does demonstrate that the determining factors for when they will be approved are not transparent. Given the influence of the Chapter 11 forum-shopping phenomenon,128 one suspects that a “big case” dynamic may be operative.129 Because necessary to reorganization means nothing more than necessary to do the deal, nondebtor releases will often be necessary to reorganization in an ex post sense: if the court does not approve the nondebtor-release deal embodied in the plan of reorganization, the deal will fall apart, and the parties will have to start over in trying to negotiate a new deal. The larger the case, the more consequential this “necessity” will be. In extremis, this ex post “necessity” of saving the deal could even present the prospect that the costs of negotiating a new deal (when added to the costs already incurred in negotiating the nondebtor-release deal) would completely exhaust the incremental going concern value of the debtor entity (over and above liquidation value), necessitating liquidation in order to maximize creditor recoveries. That, however, is a “necessity” produced solely by the rule permitting nondebtor-release deals.130 That “necessity” will never exist if nondebtor releases are prohibited because the parties simply will not negotiate nondebtor-release deals.
The emptiness of the necessity fiction lays bare the absence of any legitimate justification for giving bankruptcy courts the unique, extraordinary power to impose mandatory non-opt-out settlements (that are otherwise impermissible and unconstitutional) of tort victims’ claims against solvent entities who have not themselves filed bankruptcy. Nonconsensual nondebtor releases are not about saving an operating debtor’s business or any other bankruptcy-unique policy objective. In mass tort bankruptcies, they are all about creating an alternative system for resolving the mass tort liability of solvent nondebtors—an ad hoc system that adheres to neither bankruptcy nor nonbankruptcy norms for achieving fair aggregate settlements.131
With nondebtor releases and bankruptcy grifting, bankruptcy’s necessity fiction, and its artful manipulation of parties’ distributional rights vis-à-vis a bankruptcy debtor, has jumped from the bankruptcy system into the tort system, where it is trampling core tenets of compensatory and procedural justice in connection with victims’ claims against bankruptcy grifters. The availability of this ad hoc and superpowerful mandatory non-opt-out settlement device only in bankruptcy, combined with the well-known and rapidly escalating phenomenon of unrestricted forum shopping (and now even judge shopping) in corporate Chapter 11 filings,132 is causing a migration of mass tort litigation out of the tort system and into the bankruptcy system.133 We thus see the rise in bankruptcy grifting that Simon’s article rightly decries.
III. mandatory bankruptcy aggregation without nondebtor releases
Simon’s reluctance to embrace an outright ban on nonconsensual nondebtor releases is also motivated by her expressed fear of losing beneficial settlements if nonconsensual nondebtor releases are prohibited.134 She holds up the Takata settlement as a model of a beneficial settlement produced by giving the settling nondebtors (Honda/Acura and Nissan/Infiniti135) a discharge from their Takata airbag liability in exchange for their contributions to the settlement fund.136
I am less optimistic about the prospects of mandatory
settlements facilitating just resolutions,137 and tend to place much
more confidence in the power of claimants’ exit rights to produce fair
settlement terms.138 As Professor Richard A. Nagareda trenchantly observed, “[a]bsent
the ability to alter unilaterally [claimant]s’ preexisting rights to sue in
tort . . . settlement designers must purchase those rights
by way of the benefits promised to [claimants] for remaining in the settlement.
[Claimant]s’ preexisting rights to sue truly must be purchased rather than
simply appropriated.”139
Preserving claimants’ right to agree (or not) to participate in a proposed
settlement, therefore, “furnish[es] a kind of market test of a settlement’s
fairness and adequacy, particularly of the specific compensation offers that
will be made under the
settlement.”140 And conjecture regarding released nondebtors’ willingness to pay plaintiffs a “peace bonus”
in excess of the aggregate sum they would pay without a nondebtor
release is just that—unverified (and perhaps unverifiable) speculation. It
seems just as, if not more, likely that any value created by a nonconsensual nondebtor release is captured entirely by the released nondebtors and the lead plaintiffs’ lawyers who negotiate
the nondebtor-release deal.141
I am also more sanguine about the prospects for aggregate bankruptcy settlements with nondebtors, even if mandatory settlements via nondebtor release go away. Part of the rhetorical power of bankruptcy’s necessity fiction is creating the false impression that nondebtors simply will not settle without nonconsensual discharge of all their liability. Indeed, as Professors Howard M. Erichson and Benjamin C. Zipursky have pointed out, a similar non sequitur pervades discussions of mass tort resolutions generally: “[O]ne sees a conflation of the desire for closure and the need for closure, a merger of ideas that occurs even more easily when one party takes the [negotiating] stance that it needs closure.”142 Of course, the forces that make aggregate settlements beneficial for plaintiffs (or their lawyers), defendants, and the judiciary will not suddenly disappear in a world without nonconsensual nondebtor releases.143 Rather, aggregation will be achieved through other mechanisms, just as the decline of class-action aggregation and mandatory class-action settlements of mass torts in the wake of Amchem Products, Inc. v. Windsor144 and Ortiz v. Fibreboard Corp.145 (and then Wal-Mart Stores, Inc. v. Dukes146) led to the rise of the so-called quasi-class action through multidistrict litigation (MDL) consolidations.147
The most important element of any judicial process that can facilitate comprehensive aggregate resolutions is getting all claims into one court, which can then bring to bear the full range of judicial-management techniques for producing efficient, fair, and comprehensive resolutions.148 In that regard, there is tremendous untapped potential for mandatory bankruptcy consolidation of tort victims’ claims against both debtors and nondebtors to replace the bankruptcy grifter system of mandatory bankruptcy settlements through nonconsensual nondebtor releases. And the essential architecture for such mandatory consolidation already exists in the bankruptcy jurisdiction, removal, and venue provisions of the Judicial Code.
A. Tort Victims’ Claims Against the Debtor
With respect to creditors’ claims against bankruptcy debtors, including the disputed, unliquidated claims of tort victims, bankruptcy is a powerful aggregation device. Many components work together to produce bankruptcy’s immense aggregation power. At the heart of it is bankruptcy’s extremely broad definition of the bankruptcy “claims” that are eligible to receive a distribution from the debtor’s bankruptcy estate,149 which expressly include not only “disputed” and “unliquidated” tort claims, but also the “contingent” claims150 of future claimants who have not yet been (but will be) injured from the debtor’s prebankruptcy conduct.151
Bankruptcy’s statutory automatic stay immediately enjoins assertion of any “claim” against the debtor outside of the bankruptcy court.152 This leaves filing a “proof of claim” against the debtor’s bankruptcy estate in the bankruptcy court in which the debtor’s bankruptcy case is pending as creditors’ only recourse with respect to their claims against the debtor.153 Confirmation of a plan of reorganization establishes the aggregate distribution “fund” available to pay each class of creditor claims.154 Each individual creditor’s pro rata distribution from that “fund” (which is typically a less than payment-in-full distribution for general unsecured creditors such as tort victims) is then determined by the claims “allowance” process.155
The plan of reorganization may well establish various alternative-dispute-resolution processes for voluntary settlement of disputed claims.156 But the Bankruptcy Code also provides creditors recourse to a judicial claims allowance determination by the bankruptcy judge, in a “summary” proceeding without a jury.157 In the case of personal injury and wrongful death claims, however, the tort victim has a statutory right to a jury trial in a federal district court.158
The ultimate aggregative power of bankruptcy comes from the fact that confirmation of a plan of reorganization not only fixes creditors’ distribution rights from the debtor’s bankruptcy estate, it also “discharges” the debtor from any pre-bankruptcy claim, “whether or not a proof of the claim . . . is filed” or “such claim is allowed.”159 All creditors (broadly defined to include even future, unknown, uninjured claimants) are thus bound to the distribution rights established by the confirmed plan of reorganization, whether or not they file a claim or otherwise appear and participate in the bankruptcy proceedings—and they cannot thereafter assert their discharged claims against the debtor or the debtor’s property.160 Indeed, another automatic statutory injunction, the discharge injunction, enjoins creditors from doing so.161 And the bankruptcy court’s territorial jurisdiction to bind creditors extends to any and all who have “minimum contacts” with the United States of America.162
That is bankruptcy’s “special” statutory preclusion design to which the Supreme Court has alluded, most recently in Taylor v. Sturgell.163 Like class actions,164 that preclusion mechanism is how bankruptcy effectuates its powerful aggregation of all prebankruptcy claims against a bankruptcy debtor of every stripe, including disputed tort claims.165 Indeed, bankruptcy claims aggregation, which is a form of mandatory aggregation by preclusion, functions in precisely the same manner as settlement of a mandatory class action in achieving universal aggregation.166
In combination, those are the means by which bankruptcy “channels” creditors’ claims: (1) out of the various otherwise available nonbankruptcy state and federal fora and into one court, the federal bankruptcy court presiding over the debtor’s bankruptcy case, and (2) away from the debtor and toward and against only the “fund/s” the plan establishes for payment of creditors’ claims.167
B. Tort Victims’ Related Claims Against Nondebtors
1. Mandatory, Universal Settlement via Nondebtor Release
By replicating the effects of the bankruptcy discharge and discharge injunction for creditors’ claims against solvent nondebtors, nonconsensual nondebtor releases and permanent injunctions allow nondebtors to get in on bankruptcy’s mandatory, universal aggregation by preclusion.168 Most importantly from the perspective of both nondebtors and tort victims, that mandatory, universal aggregation by preclusion puts a hard cap on released nondebtors’ liability exposure at the amount of the “substantial assets [contributed] to the reorganization.”169 But that criterion for approval of a nondebtor release is extremely (and troublingly) vague. Indeed, “nothing in the process by which releases are approved requires contributions by released nondebtors to approximate the value of the released claims”170 nor any other meaningful review of the structural or substantive fairness of the nondebtor release deal.171
In the taxonomy of aggregation devices, mandatory universal aggregation by preclusion is the most powerful and thereby carries the most potential to ride roughshod over individual claimants’ substantive, procedural, and constitutional rights, as nonconsensual nondebtor releases and the resulting bankruptcy grifter phenomenon amply illustrate. But a range of other aggregation mechanisms exist.172 And with respect to the third-party nondebtor tort claims resolved via nondebtor release (i.e., mandatory settlement), bankruptcy contains another very powerful aggregation structure for mandatory consolidation.
2. Mandatory, Universal Consolidation of Personal Injury Claims
The essential architecture for mandatory consolidation of mass tort claims against nondebtors is already present in existing bankruptcy law. Section 157(b)(5) of the Judicial Code provides for single-district consolidation of all creditors’ related personal injury claims against a nondebtor, in a manner similar to an MDL consolidation.173 But a § 157(b)(5) bankruptcy consolidation of personal injury claims is even more powerful than an MDL consolidation in two significant respects. First, unlike an MDL consolidation, which can only consolidate cases pending in the federal courts, a § 157(b)(5) bankruptcy consolidation can centralize claims pending in both federal and state courts, through the broader removal power available under the bankruptcy removal statute.174 Second, unlike an MDL consolidation, which is solely “for coordinated or consolidated pretrial proceedings,”175 a § 157(b)(5) bankruptcy consolidation is for all purposes, including trial in a federal district court.
The consolidation power of § 157(b)(5) for tort victims’ claims against nondebtors starts with the breadth of federal bankruptcy jurisdiction, which as previously noted,176 extends to creditors’ third-party claims against nondebtors that are “related to” the debtor’s bankruptcy case.177 For any such third-party “related to” claim pending in state court when the debtor files bankruptcy (or filed in state court thereafter), the bankruptcy removal statute provides that either party may remove that “claim or cause of action” into federal court.178 Bankruptcy removal, therefore, is a more surgical removal of only a “claim or cause of action” within a pending civil action, rather than the entire “civil action,” which is the object of a general civil removal.179 Moreover, bankruptcy removal is at the instance of only one of the parties to an individual “claim or cause of action.”180 Consequently, it is impossible for an opposing party to frustrate bankruptcy removal through the kind of jurisdictional and removal spoilers that can prevent general civil removal of state-law tort claims.181
For example, imagine hundreds or thousands of personal injury
suits against two alleged joint tortfeasors (D and ND) are pending in
state and federal courts all over the country, and one of those alleged joint
tortfeasors (D) files Chapter 11. All
the tort claims against D now become
subject to the mandatory, universal bankruptcy aggregation process previously
discussed.182 In addition, though, as
long as the pending tort claims against ND
are “related to” D’s bankruptcy case,
ND can immediately remove all of
those pending tort claims from state court into federal
court,183 and any such claims that
are subsequently filed in state court will likewise be immediately removable.184
Like general civil removal, bankruptcy removal is “to the district court for the district where [the removed claim was] pending.”185 ND’s bankruptcy removal, therefore, places all of the tort claims against it in federal court, but scattered across federal districts all over the country. This is where § 157(b)(5) becomes important.
Section 157(b)(5) provides that a district-court judge in the district where D’s bankruptcy case is pending (the so-called “home court” district) “shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in which the claim arose.”186 After (or in conjunction with) removing all of the “related to” tort claims to federal court, therefore, ND can file a § 157(b)(5) motion in the district court in D’s home-court bankruptcy district, requesting that all of the tort claims against it in federal court (those that were just removed, those that were previously pending, and those that might subsequently be filed or removed) be transferred to D’s home-court bankruptcy district for consolidation there.187
Notice, then, that § 157(b)(5) gives one district-court judge in D’s home-court bankruptcy district a discretionary power, much like the MDL statute gives to the Judicial Panel on Multidistrict Litigation (JPMDL), to impose mandatory consolidation in one federal district of all of the “related to” tort claims against ND. And just like the tort claims against bankruptcy debtor D, which are subject to bankruptcy’s universal, mandatory aggregation process,188 a § 157(b)(5) mandatory consolidation of the tort claims against ND can also be universal, encompassing any and all of the “related to” tort claims that have been or will be filed against ND in any court in the country.
Such a § 157(b)(5) consolidation can not only capture the efficiencies and settlement facilitation potential from consolidating all of the tort claims against ND in one court, but also enable the joinder efficiencies and settlement facilitation from placing the claims of all victims whose claims are against both D and ND in the same court.189 And each and every victim will have the right to a jury trial in a federal district court in D’s home-court bankruptcy district for both of its claims—its proof of claim against bankruptcy debtor D and its third-party “related to” claim against nondebtor ND.190
To say that a mandatory, universal consolidation of all “related to” claims against ND can occur via § 157(b)(5) is, of course, not to say that the district court should order consolidation of those claims in D’s bankruptcy case. But the district court would have at its disposal the same kinds of considerations the JPMDL weighs in deciding whether to order an MDL consolidation.191 Moreover, if the district court decides that a § 157(b)(5) consolidation is not appropriate, the district court can also order a mandatory, universal remand of all removed state-law claims under bankruptcy’s unique discretionary abstention and remand provisions.192
There is also tremendous underexplored potential in hybrid approaches, similar to the originally intended operation of the MDL statute, that exploit the efficiency and settlement advantages of pretrial centralization, but that permit any individual trials to occur in victims’ local communities.193 As Professor Nagareda insightfully recognized, “aggregation in a world in which the modern class action does not, and will not, realistically shoulder the entire regulatory load” requires “hybridization—the combination of individual actions with some manner of centralizing mechanism” that combines “traditional litigation features with aggregate ones.”194 The flexible, discretionary nature of both § 157(b)(5)195 and the bankruptcy abstention and remand provisions196 can accommodate all manner of such creative hybrid-resolution models.
IV. the role of the supreme court
Simon envisions reforming nonconsensual nondebtor-release practice. My vision is for mandatory, universal consolidation to replace mandatory, universal settlement via nondebtor release. Can either prospect be realized?
Simon’s reforms would likely depend on some combination of judicial or congressional intervention. Given our cumulative experience with nondebtor releases, I am pessimistic about the likelihood of the courts “organically”197 reforming nondebtor-release practice, particularly given the forum-shopping dynamic that will likely continue to fuel and accelerate a race to the bottom on nondebtor releases.198 As for congressional action, I fear that corporate interests, and even certain powerful segments of the plaintiffs’ and bankruptcy bars, could frustrate any meaningful legislative reforms.199
My proposal’s comparative implementation advantage is that its actualization resides within the authority of one actor—the Supreme Court—in fulfilling its conventional function of resolving circuit splits. Nonconsensual nondebtor-release practice is illegitimate and unconstitutional substantive lawmaking by the federal courts, which the Supreme Court should put an end to. And in navigating the innate mass tort tension between individual victims’ rights and autonomy, on the one hand, and the relentless forces of aggregation, on the other, the Supreme Court appears to be the only meaningful watchdog that can ensure structural protections for individual victims—at least from the most egregious systemic abuses, which nondebtor releases are.200
Were the Supreme Court to prohibit nonconsensual nondebtor releases, there are credible indications that § 157(b)(5) bankruptcy consolidations would fill the space created by prohibition of nonconsensual nondebtor releases. Even in a world in which nonconsensual nondebtor releases are permissible, codefendants have on occasion, with mixed results, attempted the bankruptcy removal and consolidation strategy outlined in Part III.201
The only significant obstacle to fully effective use of § 157(b)(5) consolidations is the circuits’ disagreement over the scope of third-party “related to” bankruptcy jurisdiction, which was consciously designed to be as broad as the Constitution permits.202 Here, too, the Supreme Court can and should resolve this critical issue of federal jurisdiction, whose importance transcends mass tort bankruptcies and pervades the entirety of bankruptcy courts’ dockets,203 including even the most prosaic consumer bankruptcy cases.204
The vast and sprawling case law regarding the scope of third-party “related to” bankruptcy jurisdiction is in a state of utter and dizzying disarray, all of which can best be understood and explained through one straightforward, central question: is third-party “related to” bankruptcy jurisdiction simply a grant of conventional transactional supplemental jurisdiction? If so,205 then all the confusion surrounding third-party “related to” bankruptcy jurisdiction vanishes, and a nightmarishly unwieldy and problematic corner of federal jurisdiction is greatly simplified and modernized. If not, then there is seemingly no escape from the quagmire into which the courts have thoughtlessly stumbled by blindly following the Third Circuit’s badly misguided Pacor decision.206
In the Pacor case, the Third Circuit assuredly declared that third-party “related to” bankruptcy jurisdiction most definitely is not supplemental jurisdiction.207 But as I have explained elsewhere at length, every credible indication points to the conclusion that third-party “related to” bankruptcy jurisdiction is a statutory grant of modern transactional supplemental jurisdiction.208 Indeed, “use of the identical term ‘related to’ in both [the bankruptcy jurisdiction statute] § 1334 and [the general supplemental jurisdiction statute] § 1367 . . . suggests that supplemental jurisdiction is what Congress always intended when it used that term in § 1334.”209
If third-party “related to” jurisdiction is a grant of conventional supplemental jurisdiction, then there is federal bankruptcy jurisdiction over any third-party “claims [that] arose from the same nucleus of operative fact”210 as a claim by or against the debtor’s bankruptcy estate.211 In my previous example, then, all of the tort claims against ND undoubtedly would be within “related to” bankruptcy jurisdiction, and a § 157(b)(5) bankruptcy consolidation is permissible.212
Crucially, this mandatory, universal consolidation of the personal injury claims against ND could even include any future claim of an as-yet-uninjured victim, to the extent that a future claimant’s related claim against D is a bankruptcy “claim” within the meaning of the Bankruptcy Code, eligible for a distribution and subject to discharge (and thus mandatory, universal aggregation) in D’s bankruptcy case.213 The inability to aggregate such future claims is one of the principal shortcomings of other aggregation devices.214 But bankruptcy has the means—entirely within its existing statutory structure—to aggregate not only future claims against the debtor, but also future claims against nondebtors via § 157(b)(5).
Under Pacor’s interpretation, which concludes that third-party “related to” bankruptcy jurisdiction is not supplemental jurisdiction, the absence of any federal bankruptcy jurisdiction over the tort claims against ND is an absolute nonstarter for a § 157(b)(5) consolidation.215 By correcting the severe systemic flaw that Pacor introduced into the critical infrastructure of federal bankruptcy jurisdiction, therefore, the Supreme Court would, in the process, also open the door to maximally effective § 157(b)(5) consolidations and aggregate settlements. Indeed, one of the prominent policy rationales for modern transactional supplemental jurisdiction is facilitating joinder of related claims in one court and, thereby, settlement of complex disputes.216 In fact, § 157(b)(5) consolidations would be an immensely more powerful and fairer centralization process than MDL consolidations.
The comprehensiveness of a § 157(b)(5) consolidation will be particularly appealing to nondebtor defendants,217 who would be the necessary drivers of the centralization process, through exhaustive removals and § 157(b)(5) consolidation motions. Even more importantly, § 157(b)(5) consolidations should prove more advantageous to tort claimants than MDL consolidations.
MDL consolidations are hamstrung by the inability of MDL transferee courts to try transferred cases without the consent of all parties. Moreover, remands to transferor courts for trial are exceedingly rare.218 MDL consolidations, therefore, have become a procedure focused almost exclusively upon settlement, in which plaintiffs cannot wield their most effective settlement cudgel: a credible threat of taking cases to trial.219 This “sharply skews the MDL bargaining process in favor of defendants.”220 A § 157(b)(5) bankruptcy consolidation, by contrast, in which every personal injury claimant would have a statutory right to a jury trial on their claims against ND in the transferee federal district court (where D’s bankruptcy case is pending),221 could restore a more level playing field for both aggregate settlement negotiations with ND and resolution of residual “opt out” cases against ND.222
Conclusion
Simon’s Bankruptcy Grifters article shines a bright and penetrating light on alarming injustices occurring through the intimidatingly complex and mysterious machinations of corporate bankruptcy proceedings. As a practical matter, the Supreme Court is the only institution that can put a stop to bankruptcy grifting, by prohibiting nonconsensual nondebtor releases. By reversing Pacor’s error, the Supreme Court can also pave the way for a fairer bankruptcy process for aggregate resolution of mass tort claims against nondebtors.
Ralph Brubaker is the James H.M. Sprayregen Professor of Law at the University of Illinois. The author is very grateful to Troy McKenzie, Bob Lawless, Josh Silverstein, Douglas Baird, Vince Buccola, Adam Levitin, Charles Tabb, and Rick Marcus for helpful comments and conversations.