Chapter 11 filings used to imprint a scarlet letter on a company that was usually actually bankrupt in the classic sense of the word. Not so today. To the contrary, events most everyday illustrate that chapter 11 filings have little to do with actual insolvency, and instead are just part of the larger dance between tort claimants, defendants, shareholders, directors and officers, and their insurers. The examples illustrate why chapter 11 is out of control, and needs serious improvement. As is, state laws are largely irrelevant except for fraudulent conveyance rules, and so bankruptcy courts are now the vehicle for displacing state laws that financiers find inconvenient and expensive. Chapter 11 cases also are where the MOUs go to obtain class actions and res judicata results they could never obtain in regular federal or state proceedings. Once has to ask – why is this allowed, and is it constitutional in application ?
Examples ? Here are two. This article looks ahead to Sam Zell”s deposition on the more than plausible claim that the Chicago Tribune lbo and related transactions included a fraudulent transfer of assets. As the article explains, the deposition is part of the dancing between creditors seeking leverage regarding all the debt taken on to finance Mr. Zell’s activities. In short, one issue is whether the megalenders can be stripped of their purported rights so that other debt holders and ordinary trade creditors can be paid what they are owed ? Through the chapter 11 case, the parties likely will end up with a de facto class action, but Rule 23 class action standards will not be explored and its procedural rules will not be applied. Is this really "good" for anyone other than masters of the universe ?
In cases arising from mass tort claims, part of the dance is intended to immunize directors and officers from claims relating to corporate activities, such as corporate asset transfers of assets. The latter point is illustrated by this article from the Madison-St/ Clair Record regarding the Durabla asbestos bankruptcy and efforts to use an adversary proceeding in the chapter 11 to immunize the officers and directors for corporate transfers. Once again, the issues are being teed up to provide national res judicata that would not be created in an ordinary case between two litigants, and the proceedings can easily be viewed as a de facto class action that does not follow the rules for class actions.