Chapter 11 bankruptcy as a means for resolving mass tort claims

In recent years, a growing number of defendants have sought to use reorganization under chapter 11 of the United States Bankruptcy Code to obtain permanent and complete relief from mass tort claims. Many of these entities were defendants in asbestos bodily injury litigation, and were eligible for the special protections for such claims provided in Bankruptcy Code section 524(g). Yet defendants facing other types of claims – including those alleging bodily injury from silica, talc, silicone breast implants, opioid painkillers, and allegedly defective ear protection – also have pursued relief in bankruptcy cases. Several Roman Catholic dioceses, as well as the Boy Scouts of America, have used chapter 11 to seek permanent solutions to sex abuse claims. 

The general outline of the chapter 11 strategy for all of these defendants is similar. A debtor entity obtains immediate relief from tort system litigation (and its attendant costs) by filing bankruptcy, due to the automatic stay of all litigation under Bankruptcy Code section 362. It then prepares a chapter 11 plan that establishes a settlement trust to resolve the mass tort claims against it. The debtor will ask a Bankruptcy Court to issue an injunction that will force mass tort claimants to forego tort litigation against the debtor, in favor of submitting to the settlement trust for resolution.  The debtor’s aim is to emerge from the chapter 11 proceeding shorn of its mass tort obligations, with the settlement trust serving as the exclusive source of resolution for those claims on a permanent basis.

The role of insurance in mass tort bankruptcy cases

Liability insurance tends to play a critical role in these cases. Insurance often is one of the chief assets (if not the only asset) the debtor has available to fund its mass tort liabilities. Thus, in most mass tort chapter 11 plans, insurance serves as one of the main sources of funding for the settlement trust.  Without committed funding, neither a settlement trust, nor the chapter 11 plan that creates it, will be viable.

The most common way for insurance to be used to fund a mass tort chapter 11 plan settlement trust is via settlement.  Settlements often are structured as policy buy-back agreements, through which an insurer agrees to pay a sum-certain to repurchase all of the debtor’s rights to coverage for the mass tort claims (or any and all claims) under the subject policies. Upon bankruptcy court approval, the settling insurer can qualify for permanent injunctive relief as a “good-faith purchaser” of an asset of the bankruptcy estate under section 363 of the Bankruptcy Code. In asbestos cases, insurers also can qualify for additional protection under Bankruptcy Code section 524(g). These protections serve as significant incentives for insurers to settle and support their policyholders’ efforts to obtain permanent relief from mass tort claims through a chapter 11 proceeding. 

Claimant approval vs. insurer consent:  A debtor’s conundrum

A successful mass tort chapter 11 case involves the careful balancing of a variety of interests, particularly those of the mass tort claimants and the insurers whose policies may fund the settlement trust. Every mass tort chapter 11 plan is subject to a vote by mass tort claimants on whether to support or reject the plan, and it is practically impossible to confirm the plan without those claimants’ support. Conversely, insurers who are unwilling to settle with the debtor – or who are willing to settle, but for an amount that the mass tort claimants believe is insufficient – may object to and litigate against confirmation of the plan before the Bankruptcy Court.

When tort claimants and insurers cannot reconcile their positions, debtors are typically forced to choose between peace with one side or the other. Because claimant support usually is critical to the success of a chapter 11 plan, debtors almost always pursue a path favored by claimants. As a result, debtors are often left to either litigate with insurers over their coverage obligations for the claims at issue, or assign their rights to coverage from the insurers to the settlement trust, which will step into the shoes of the debtor to pursue coverage after the trust has been established.

Insurance assignments have drawn significant opposition from insurers in plan confirmation proceedings.  Although many mass tort chapter 11 plans include “insurance neutrality language” that preserves insurers’ coverage defenses in coverage litigation, insurers have objected to plan confirmation on the basis that the settlement trust construct itself violates the economic relationship that is embodied in the insurance policies, and “rewrites” those policies’ provisions regarding insurers’ right to control or associate in the defense of claims.  Insurers also often attack the trust’s claims resolution procedures (which form part of the plan) as being too loose and creating the possibility that fraudulent or unmerited claims will be paid – thereby increasing the insurers’ risk exposure when the trust pursues the assigned coverage rights.

No insurer “veto” over a mass tort bankruptcy plan

Although a number of courts have recognized the right of insurers to object to plan confirmation, none has ruled that insurers have veto power over a chapter 11 plan, or that their consent is essential for plan confirmation. Similarly, “insurance neutrality language” is not required under any Bankruptcy Code section, so even mass tort plans that lack that language may be confirmed without it. Bankruptcy judges often have been adamant that their confirmation decisions will not adjudicate coverage issues, leaving those issues to be addressed in coverage litigation at another time.

Thus, defendants have a viable path toward permanent relief from mass tort claims through a chapter 11 proceeding even when their insurers will not agree to support them in that approach. Although the costs of litigating insurer objections to confirmation of a mass tort chapter 11 plan may not be insignificant in the short run, the potential long-term upside – final and global resolution of mass tort claims – may be worth the investment.