Chapter 11 bankruptcy courts never cease to amaze. Until the debtor is out of chapter 11, they claim immense power. Thus, this post from the Weil bankruptcy blog describes a case in which the court decided to order the terms for a contract so that the debtor could exit bankruptcy. 

On the flip side, once the debtor is off and running, the bankruptcy courts often are modest in their assertions of power. For example, they let asbestos bankruptcy trusts run wild and do more or less whatever they please. 

The chapter 11 bankruptcy code terms and "common law" bankruptcy rules are a disaster when it comes to mass torts. One wonders if reform will ever happen. 

By itself, the 2009 GM bankruptcy was a poster child for some of the many flaws in chapter 11 and bankruptcy law as used to handle contingent liability claims. See, for example, here, here, here, and here. That said, Bankruptcy Judge Gerber sometimes did draw a due process lines in terms of cutting off claims without notice and a hearing. See herehere (Wilmer Hale article), here (brief of Public Citizen and others). On later appeal, Judge Kaplan, however, tossed out due process and barred tort claims with alacrity.

That poster child status is now reinforced by  the emerging story about GM’s now started recall of defective ignition switches. This new recall is based on information indicating GM chose not to to act on that dates back to at least 2003, and appears to involve at least 13 deaths.

GM’s bankruptcy petition was not served on and did not give notice of the defective ignition switches  to car owners, to subrogated property insurance companies that paid for damage to cars that were hit after stalls,  or to subrogated health insurers that paid for medical services for killed or injured people. Perhaps GM is not or was not liable for negligence or under strict liability – that’s not clear. But plainly it is clear that due process is not possibly satisfied when bankruptcy courts cut off claims that are creatures of state law, and before the claims can be known, especially if the company failed to act despite superior information. See also here (Frost Brown Todd article), here (Kramer Levin article on use of Code section 105 powers); here (Linda Mullenix’ early  2003 paper on Agent Orange and due process rights of unknown claimants), here (later 2003 article by Mullenix); here (Second Circuit’s 2001 opinion in Stephenson v. Dow Chemical), here (popular press article on the rulings by SCOTUS in cert on Dow), and here (economic look at Dow).

A new post at Weil’s Bankruptcy Blog includes commentary from Canadian lawyers on bankruptcy law flexibility when confronted with a mass disaster. In short, the recent mass rail disaster in Quebec produced an unexpected set of issues when the rail line sought bankruptcy protection. But under a quirk of old statutory law, railroads were excluded from the bankruptcy regime. Nonetheless, a Quebec judge took jurisdiction under the bankruptcy law, asserting power under equitable principles. The judge likewise issued an injunction protecting an insurer of the railroad. Apparently, however, the flexibility has not yet been challenged. 

For both substance and style (breezy and brief, with some dry wit), it’s hard to beat Weil Gotshal’s Bankruptcy Blog. And, now, a new post at the blog brings a "Stern" update through a 7th Circuit case especially relevant to mass tort lawyers who find their clients more frequently intersecting with bankruptcy courts. As a reminder, Stern is notable for reminding  – and holding again – that bankruptcy courts are courts of limited jurisdiction. Therefore, the bankruptcy courts sometimes are deemed too far off the reservation when they purport to decide issues that are not "core" bankruptcy issues.

In the 7th Circuit case, it held that the bankruptcy court went beyond its jurisdictional power when it resolved "alter ego" claims brought by a plaintiff. The outcome in the 7th Circuit, however, resulted in part from waiver of arguments by the defendant. Time will tell where all the Stern rulings go. For now, it’s clear Weil’s blog will keep us all informed, via the Stern Files



Asbestos defendants continue to convince state legislatures to create some long overdue intersections between personal in jury claims in te the tort system and in the bankruptcy trust claiming system. The most recent outcome is in Oklahoma, where legislators approved this new statute.  The governor is expected to sign the bill. 

The new statute is fairly broad. It applies to all types of personal injury trust funds created from a lawsuit – not just asbestos trust funds. The statute in essence forces plaintiff’s to process and disclose claims against trust funds at least 180 days before a trial date. The statute also mandates presumptive admissibility of the documents submitted by plaintiff to the trust fund, as well as the governing documents for the trust. The statute gives defendants that go to verdict a right to offset a payment by the trust against damages awarded in court. The statute also creates a rebuttable presumption that the trust will make a payment for the "liquidated value" set out in the trust fund documents. 

Bankruptcies are frequently used to resolve mass tort situations. In some instance, a bankruptcy is fairly foreseeable as tort claims grow. Therefore, a pertinent question is whether or when bankruptcy courts will enforce or strike out contract clauses that purport to operate upon the filing of bankruptcy petition or insolvency. A recent case in Canada adresses the topic, and is summarized by Canadian lawyers in a guest post on Weil’s Bankruptcy Blog. The introduction is set out below: 




This article has been contributed to the blog by Mary Paterson and Patrick Riesterer. Mary Paterson is a senior associate in the litigation group of Osler, Hoskin & Harcourt LLP and Patrick Riesterer is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP.

In Aircell Communications Inc. v Bell Mobilicity Cellular Inc., 2013 ONCA 95 (“Aircell”), the Ontario Court of Appeal applied the “fraud upon the bankruptcy law” principle when deciding a dispute between a telecommunications company (“BDI”) and an independent dealer that sold BDI’s products and services on commission. The principle is an important common law rule intended to prevent parties from contracting out of insolvency legislation and depriving the estate of assets that otherwise could be distributed to unsecured creditors (“pari passu” distribution). The term ‘fraud’ is not used to refer to dishonesty, but rather to the effect of on the estate if the principle were not applied. The fraud upon the bankruptcy principle often goes by other names."