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. 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. Bankruptcy, we pointed out, is designed to prevent a race to the courthouse that can destroy enterprise value. 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 our 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. Our prior defense of bankruptcy started from a specific fundamental theory of civil litigation. On 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.
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. The 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.
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. Aggregated litigation in bankruptcy can reduce individual voice and might limit the development of private law remedies. 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, 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.
In a recent essay, we respond to this critique on its own terms. Even accepting the premise that victims’ monetary recoveries and their right to vote in favor of settlements should sometimes be sacrificed for noneconomic public-regarding values, 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.
The disconnect arises because bankruptcy’s critics work from a caricatured description of the bankruptcy process. They posit some ethereal “bankruptcy culture” that ruthlessly pursues efficiency and prevents bankruptcy courts from developing law, reviewing cases on the merits, and providing victims with an opportunity to be heard. They argue that bankruptcy prevents plaintiffs from testing novel tort theories, that it fails to protect future claimants, and that it limits discovery that supports future regulation.
In practice, however, bankruptcy can and often does support public-regarding, non-economic 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, extensive discovery, and the broadest protection of victims’ rights to be found in any existing aggregated judicial procedure – and it affords bankruptcy judges the power and discretion to go even further to enhance plaintiff voice and certify trials to state and district courts. Because bankruptcy both is efficient and supports the realization of non-economic goals, Troy 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.”
This debate is far from academic. As we write, legal challenges to bankruptcy courts’ authority to resolve collective proceedings mean that approximately $10 billion set aside in an opioid settlement cannot be disbursed. Similarly, over $2 billion in funds for victims of sexual abuse in the Boys Scouts are at risk.[1] Blocking these payments and settlements in exchange for non-monetary 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 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.”
ENDNOTE
[1] See Order, Lujan Claimants v. Boy Scouts of Am., No. 23A741 (U.S. Feb. 16, 2024) (Alito, J., in chambers) (“Upon consideration of the application of counsel for the applicants, and the responses filed thereto, it is ordered that the March 28, 2023 order of the United States District Court for the District of Delaware, case No. 1:22-cv-1237, and the consolidated cases, is hereby administratively stayed pending further order of Justice Alito or of the Court.), https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/23a741.html [https://perma.cc/G9XD-QG9C]; Randall Chase, Boy Scouts’ $2.4 Billion Bankruptcy Plan Upheld by Judge, Assoc. Press (Mar. 28, 2023, 8:14PM EST), https://apnews.com/article/boy-scouts-bankruptcy-child-sexual-abuse-f6359f826b98d471c290598573ebc5da [https://perma.cc/7TDK-BV3H] (reporting the district judge’s order upholding the bankruptcy plan); Brief of Ad Hoc Group of Local Councils of the Boy Scouts of America as Amicus Curiae supporting Debtor Respondents, Harrington v. Purdue Pharma L.P., No. 23-124 (U.S. Oct. 27, 2023), https://www.supremecourt.gov/DocketPDF/23/23-124/288234/20231027135109097_23-124%20bsac%20Boy%20Scouts.pdf [https://perma.cc/YFV3-JDKS] (defending the district court’s order).
This post comes to us from professors Anthony J. Casey and Joshua Macey at the University of Chicago Law School. It is based on their recent essay, “Bankruptcy by Another Name,” available here.