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  • Writer's pictureKirk Hartley

Example of Tort System Impact When Manufacturers Use Chaper 11 to Exit the Tort System – Many

Today is a soapbox day. In my view, a recent jury verdict in a car wreck case in Georgia nicely illustrates the very real tort system impacts that arise when entities such as Chrysler exit the tort system via chapter 11 without leaving behind insurance, cash or other economic rights sufficient to pay valid underlying tort claims. The exemplar case is identified in the caption shown to the left; see below for the full story from the Fulton County Daily Report, which includes links to the verdict form and the full pretrial order.

In my view, as molded and shaped by a wise bankruptcy scholar, chapter 11 has many, many problems today. One is that it is badly in need of judges who actually apply existing law and do not acquiesce to deals that obviously violate due process and existing law. In addition, critical thought is needed about what the chapter 11 statutes and common law rules should say in connection with entities using chapter 11 to escape product liability and other long-tail tort risks or obligations. The exemplar trial also exposes some aspects of the material lack of continuity and rationale economic and social policy thinking as between chapter 11 law and state tort law. In addition, facts not in the trial expose other problems related to the presence or absence of insurance, and thus implicate domestic and overseas law regulating insurance. In my view, statutes and common law rules on insurance (or the absence of insurance) also need much work to deal rationally with the chapter 11 system, as well as the insolvency laws of other nations.

In the trial, the net result is that Chrysler’s exit of the tort system left the plaintiff without full compensation as awarded by an apparently very rationale jury (see full story below), and also put a component supplier at what seems to be an unfair and unwise risk of being hit with a large verdict as indemnitor of Chrysler. As stated in the pretrial order, the facts are simple. A drunk driver’s car hit another car with four occupants. Three occupants were essentially unhurt, but an 11 year old child suffered separation of her skull from her spine, and permanent injuries to her endocrine system. The child suffered the severe injuries because a car seat failed. The plaintiff sued the drunk driver and the car seat supplier. The seat supplier’s contract with Chrysler called for it to indemnify Chrysler if the component supplier had erred.

Ultimately, the seat supplier was exonerated at trial. But, it surely was at risk that a frustrated jury might have decided to find against the seat supplier for Chrysler’s failure. And, the jury might also have found against Chrysler. If that had happened, without Chrysler at trial, then Chrysler might later have sought to file new legal proceedings to invoke its indemnity rights against the component supplier, and in that new case (or arbitration) might have claimed that it was not bound by the jury verdict since Chrysler was not represented at trial.

In sum, the fact pattern illustrates some of the many flaws in the lack of a rationale interplay between chapter 11 and state tort law. To see some of the other issues, ask yourself: where is insurance for the claim? Apparently there was no insurance, probably meaning Chrysler had self-insured (or, perhaps it had settled out all its polices through a lump sum settlement in which the insurer paid a fee to Chrysler to terminate some or all of the old CGL policies, with Chrysler pocketing the money and using it for purposes other than tort claims.) And, further yet, ask if it is is wise to allow a self-insurance/no insurance approach by manufacturers when obviously cars will suffer defects and failures, causing devastating injuries to some number of unfortunate victims who were powerless to do anything to block their fate. Think also about how all that interplays with offshore manufacturers that may exit the US tort system under insolvency laws of other nations. Think too of the offshore insurers (e.g. Lloyds) that may exit the tort system via British" schemes of arrangement" that allow insurers to almost completely avoid honoring long-tail insurance obligations.

Hat tip to the National Law Journal for republishing the full story from the Fulton County Daily Report, and providing links to the verdict and pretrial order.

Jury Awards $15 Million in Accident Case, Clears Lawyerless Chrysler

Greg Land

Fulton County Daily Report

March 16, 2010

A Georgia state court jury has held an alleged drunk driver responsible for $15 million in damages to a girl injured in a car accident, but the plaintiff likely will get only a fraction of the award because the driver has few resources and the designer of the girl’s seat, which broke during the wreck, was cleared by the jury.

Complicating matters, according to the plaintiffs lawyers, was the bankruptcy-mandated dismissal of what was then DaimlerChrysler Co. from the case. Jurors faced a verdict form containing a line allocating blame to Chrysler, but no one represented the automaker at trial.

"The jury wanted to attribute some portion of the liability to Chrysler, given that Chrysler had designed the vehicle," said Law & Moran partner E. Michael Moran, who spoke to the panel after the Feb. 17 verdict (pdf) was released. "But as they were working through that, they had concerns about the fairness issue, because Chrysler didn’t have a lawyer there defending them."

Chrysler went into bankruptcy protection last year, and the bankruptcy court approved its sale to Italian automaker Fiat last June; its new incarnation, Chrysler Group LLC, is protected from liability for cars manufactured prior to its bankruptcy declaration. But, in accordance with Georgia’s 2005 tort reform law, Chrysler was still listed as a non-party defendant on the verdict form, which provided a space for apportioned damages.

"Under the law, Chrysler would not have had to pay anyway," said Moran. "We attempted to explain to the jury how it worked, but it’s a bit complicated, and I guess we didn’t do a good enough job explaining it."

The case began Jan. 1, 2007, when a Honda Accord driven by Joseph J. Covert ran a red light in Alpharetta, Ga., and hit the right side of a 2000 Jeep Grand Cherokee carrying Michael and Jacqueline Maybaum and their daughters, Jennifer, then 5, and Erica, then 11.

Erica was in the rear left-hand seat and wearing her seatbelt, according to the pretrial order. The impact caused a hinge pin at the base of her seat to pop out and she was pitched backward into the cargo compartment.

According to the pretrial order, Erica’s head struck "something hard" with such force that her skull was dislocated from her spine, and she suffered "catastrophic brain injuries that have permanently compromised her endocrine and pituitary systems, as well as her bodily hormone balance."

The other three seats remained upright, and Moran’s partner Peter A. Law said the other passengers in the Jeep, also named plaintiffs in the case, suffered "no significant injuries at all."

The complaint in the original suit, filed in April 2007 by Law and Jason L. Crawford and Peter L. Daughtery of Columbus, Ga.’s Daughtery, Crawford, Fuller & Brown named Covert and DaimlerChrysler as defendants. It claimed that the automaker "has been on notice for years that many of its seats and seating systems, including the seat and seating system in this case, are defectively designed and inadequate at keeping occupants restrained from rearward movement in foreseeable collisions."

Six months later, Johnson Controls, which designed and manufactured the seats, was added as a defendant to the suit.

Chrysler initially expressed interest in taking the case into mediation, but broke off talks as its financial situation deteriorated, said Moran. The automaker was eventually severed, then re-entered as a non-party at-fault defendant for trial.

In the defense portion of the pretrial order (pdf), Johnson Controls argues that the seats it provided "met and exceeded Chrysler’s performance requirements, were tested and approved by Chrysler, and exceeded all Federal Motor Vehicle Standards."

Following a seven-day trial before Fulton County State Court Judge Patsy Y. Porter, the jury took about four hours to find Covert liable for $15 million in damages to Erica Maybaum; $10,000 to her sister, Jennifer; $15,000 to Michael Maybaum and $60,000 to Jacqueline Maybaum.

Johnson Controls was represented by Richard K. Wray and Tracy G. Ferak of Chicago’s Reed Smith and Ronald D. Reemsnyder of Cumming’s Ragsdale, Beals, Seigler, Patterson & Gray, who served as local counsel.

Ferak said post-trial conversation with jurors indicted that they had little trouble finding for her client.

"They said they reached a unanimous verdict [on Johnson Controls] on the very first ballot, then moved on to Chrysler, which was more mixed," she said.

Ferak said the panel was particularly impressed with the testimony of Timothy Brademyer, a Johnson Controls engineer.

"They said he just seemed very honest," she said, telling jurors, "’Look, I’m the engineer, here’s how we do it.’ And I think they thought some of the plaintiffs’ experts were just not as believable."

"They also said our presentation style was more credible; they used the term ‘classy.’"

William T. Casey Jr. of Marietta, Ga.’s Hicks, Foster & Casey, who represented Covert, said via e-mail that his client "admitted negligence and causation on all but the catastrophic injuries of Erica Maybaum. His policy limits were offered long ago.

"The Plaintiffs and co-defendant could not have tried a better case," added Casey. "I tried to push some blame onto the co-defendant without appearing to run from my client’s culpability. The jury simply did not think the injuries were caused by the seat manufacturer and returned a verdict against Mr. Covert only. I do not anticipate an appeal on behalf of Mr. Covert."

Moran said that Covert’s insurance and the Maybaums’ underinsured motorist coverage would cover some of the judgment, but "nothing close" to the total award. Covert, whose DUI charges are still pending, has few assets to go after, he said.

"We got such a great trial from Judge Porter, there’s little chance that we’ll appeal," he said.

Law said Erica Maybaum has since recovered well, although she had to have a steel rod and screws inserted to reconnect her skull to her spine.

"She does really well," he said. "She plays softball, or has played softball; you wouldn’t be able to tell she’s had such a traumatic injury."

The case is Maybaum v. Johnson Controls, No. 2007EV002273-

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