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  • Writer's pictureKirk Hartley

When Will the Chamber of Commerce Point Out That Bankruptcy Courts are Judicial Hellholes? There Are

Why have bankruptcy courts escaped being labeled as “judicial hellholes” for distorting tort law rules?  The question has been around for years, but the Second Circuit’s GM opinion last week provides a recent catalyst to re-ask the question due to its dissection of the nonsensical notion that actual or potential tort claims could be taken away without payment or prior notice.

The “hellhole” label was created about 15 years by the US Chamber of Commerce. Back in 2002, it started spending much time ripping state court “judicial hellholes” (both real and faux) in an annual publication. See here for a collection of its annual hellhole publications.  Time and again, the Chamber complained long and loud about distortions of tort law.

The mystery is why the Chamber has never ripped the bankruptcy courts that have done more to hurt manufacturers by entering absolutely awful orders purporting that distort state law by cutting off the rights of tort system co-defendants without prior notice or payment. Perhaps the most awful distortion of state law occurred through the Johns-Manville bankruptcy. The Manville saga of error and gross claim underestimation (by at least 8x) continues  to hurt massive numbers of asbestos co-defendants that remain in the tort system, not to mention the underlying claimants who were treated even more shabbily. For a history provided to Congress, see here and note the disastrously poor predictions of the future and disastrously broad bankruptcy court rulings.

With that in mind, it’s always been amazing to me to watch bankruptcy courts shred due process, sometimes anchoring claimed powers around bankruptcy code section 105. Happily, Weil Gotshal recently pointed out a new 1st Circuit opinion (In re Colon) that refused to use section 105 as an anchor to do anything under the sun (convert a chapter 12 to a 7), and Weil concurred. The July 15, 2016 post explained:

“Bankruptcy attorneys are often tempted to use Section 105 of the Bankruptcy Code as a tool to provide their clients with substantive rights otherwise unarticulated in the Bankruptcy Code. In re Colon serves as another reminder that Section 105 is not a catch-all provision for substantive rights otherwise unavailable under the Bankruptcy Code. Rather, Section 105 merely serves as an authorization of the bankruptcy court to exercise equity in carrying out the substantive rights already provided for by other provisions of the Bankruptcy Code.

The GM opinion really should provoke critical thinking about past denials of due process in bankruptcy proceedings. Hopefully the US Chamber of Commerce and others will start pointing out that the Bankruptcy Code does not trump due process, and that it’s always been illegal to use the code to take away the state law insurance and tort law rights of co-defendants and underlying plaintiffs.

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