WASHINGTON, D.C. – The debate over whether mass torts should be handled in bankruptcy court has gained significant attention. One recent example is the Boy Scouts of America, which faced tens of thousands of claims of child sexual abuse dating back several decades. Fearing the potential end of its operations, the organization filed for bankruptcy in 2020. Now, the proposed terms of the Boy Scouts’ bankruptcy settlement could prevent survivors from seeking justice in other courts, regardless of whether they agree to the deal. The U.S. Supreme Court is currently considering the permissibility of such terms.
Mass tort bankruptcies, like the one involving the Boy Scouts, arise when a large company or entity faces a flood of litigation from alleged victims. High-profile cases have encompassed issues such as the opioid crisis, products liability, and sexual misconduct. To protect themselves from claims, these defendant companies file for Chapter 11 bankruptcy under the U.S. Bankruptcy Code, which halts all litigation. Victimized individuals become claimants who must then work with the company to reach a settlement if they hope to recover any compensation.
Proponents argue that bankruptcy court is the appropriate venue for handling mass tort claims, as it benefits both the debtors and victims. They assert that the Bankruptcy Code provides immediate relief from costly litigation for debtors, allowing their businesses to continue operations. Additionally, they contend that the bankruptcy process maximizes the value of the debtor’s estate and pools resources for equitable distribution to claimants. Proponents suggest that victims may actually receive more compensation through bankruptcy settlements than they would through traditional civil litigation.
Critics, however, dispute the claims made by proponents and highlight the potential imbalances in the bankruptcy system. They caution that defendants in mass tort cases may exploit bankruptcy proceedings to deprive victims of their day in court. Concerns have been raised about the use of non-debtor third-party releases, which grant immunity from future lawsuits to interested parties as a condition of settlement. The legality of such releases without the consent of all victims remains a matter of debate among courts.
Furthermore, critics argue that debtors have more procedural influence in bankruptcy proceedings compared to civil litigation, potentially compromising the fairness of the process. They caution that entities may strategically choose to file in jurisdictions with judges known to favor debtors. Additionally, they express concerns about the trust fund compensation process, which requires victims to bring all claims against a central trust rather than pursuing individual lawsuits. Critics argue that this process may lack sufficient procedural protections, such as the right to appeal award determinations.
While proponents and critics continue to present their arguments, scholars and commentators are engaged in discussions about the future of mass torts in bankruptcy. Some propose reforms to address potential abuse and ensure fair outcomes for all parties involved. These include reducing the evidentiary burden for victims to prove fraudulent transfer claims against debtors, as well as reforming non-bankruptcy laws to facilitate findings of individual liability for corporate misconduct. Others advocate for measures to curb the misuse of bankruptcy proceedings, such as subjecting non-debtors to the same procedural requirements as debtors and imposing stricter criteria for approving third-party releases.
As the debate unfolds, legal experts and lawmakers are grappling with complex questions regarding the proper role of bankruptcy court in handling mass tort claims. With diverse perspectives and potential reforms on the table, the fate of victims seeking justice in these cases hangs in the balance.