Due Process Alignment in Mass Restructurings
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates, Chapter 11, Mass Torts | 0

By Sergio J. Campos (University of Miami School of Law) and Samir D. Parikh (Lewis & Clark Law School)

Sergio J. Campos
Samir D. Parikh

Mass tort defendants have recently begun exiting multi-district litigation (MDL) by filing for bankruptcy. This new strategy ushers defendants into a far more hospitable forum that offers accelerated resolution of all state and federal claims held by both current and future victims.

Bankruptcy’s resolution promise is alluring, but the process relies on a very large assumption: future claimants can be compelled to relinquish property rights – their cause of action against the corporate defendant – without consent or notice. Bankruptcy builds an entire resolution structure on the premise that the Bankruptcy Code’s untested interest representation scheme satisfies Due Process strictures. This Article questions that assumption, and identifies two compromised pillars. Primarily, the process for selecting the fiduciary that represents future victims’ interests (FCR) is broken. Further, the process by which courts estimate the value of thousands of mass tort claims places too much pressure on a jurist unfamiliar with personal injury claims. These compromised pillars raise the risk that the settlement trust will be underfunded and fail prematurely. In this outcome, future victims would have no recourse but to argue that the process did not satisfy Due Process, and the settlement should be unwound.

This Article proposes that the risk of a prematurely insolvent victims’ trust can be reduced considerably by making two adjustments. Our proposal seeks to (i) rebuild the FCR construct in order to ensure that future victims’ interests are effectively represented, and (ii) recalibrate the claim estimation process by facilitating coordination between the bankruptcy court and nonbankruptcy trial courts.

The full article is forthcoming in the Fordham Law Review and is available here.

 

Reviewing Redwater: An Analysis of the U.S. and Canadian Approaches to Environmental Obligations in Bankruptcy
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, International and Comparative | 0

By Laura N. Coordes (Associate Professor of Law, Arizona State University – Sandra Day O’Connor College of Law)

Laura N. Coordes

The United States and Canada have both seen significant litigation over the treatment of environmental obligations in bankruptcy proceedings. Both countries also have robust regulatory and statutory frameworks with respect to bankruptcy and environmental law, making the two jurisdictions ripe for comparison.

Although the U.S. legal landscape differs somewhat from Canada’s, courts in both countries have struggled to sort out the treatment of environmental obligations in bankruptcy. However, in 2019, the Supreme Court of Canada decided Orphan Well Association v. Grant Thornton Limited (“Redwater”), which characterized environmental obligations, not as claims, but as duties owed to the public that could not be compromised in bankruptcy. Meanwhile, U.S. courts continue to grapple with the question of how to treat a company’s environmental obligations in bankruptcy.

This article analyzes the impact of Redwater and highlights issues that U.S. scholars and policymakers should consider as they press for changes. In particular, the article focuses on three questions: (1) What is the role of the legislature as compared to the judiciary? (2) What is the role of federal law, as compared to provincial or state law? and (3) What is the role of the public interest?

These three questions implicate debates that go beyond the immediate issue of the role of environmental law in bankruptcy proceedings. However, considering environmental and bankruptcy law in light of these universal issues illuminates unresolved tensions that both the U.S. and Canada will likely continue to face on a larger scale.

The full article is available here.

Inequitable Subordination: Distressing Distressed Claims Purchasers by Propagating Subordination Benefit Elimination Theory
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Claims Trading, Jurisprudence | 0

By Jay Rao (University of California, Berkeley, School of Law)

Jay Rao

This Article examines the application of equitable subordination under Title 11 of the United States Code to bankruptcy claims purchasing transactions that transpire after the occurrence of inequitable conduct by a third party. Although a significant issue with practical consequences, it has drawn relatively scant commentary. To the author’s knowledge, no scholarship to date has attempted to comprehensively discuss the issue or describe the indirect cleansing and washing of tainted claims resulting therefrom. While analyzing and criticizing the current state of the law, this Article introduces the concepts of the “subordination benefit,” “subordination benefit elimination theory,” and “limited subordination benefit theory” to facilitate and further conversations related to the intersection of equitable subordination and bankruptcy claims trading.

This Article primarily aims to promote an active, fluid bankruptcy claims trading market to, on an ex post basis, benefit creditors and, on an ex ante basis, reduce the cost, and induce the extension, of credit in the primary capital markets, thereby supporting the broader economy. Additionally, this Article seeks to reduce indirect cleansing of tainted claims and indirect claims washing through the bankruptcy claims market.

The subject matter is particularly timely and relevant, given the recent publication of the Final Report and Recommendations of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11, the significant growth of the claims trading market and increasing activity and sophistication of distressed investors, and the recent formation of the American Bankruptcy Institute’s Claims Trading Committee.

This Article argues that subordination benefit elimination theory, which represents the dominant theory propagated by courts and commentators, finds support in a misguided reading of caselaw and conflicts with sound economic policy and logic. Further, while acknowledging limited subordination benefit theory is a superior approach to subordination benefit elimination theory, this Article argues that limited subordination benefit theory also runs contrary to sound economic policy and logic. This Article requests commentators and courts halt and reverse the propagation of subordination benefit elimination theory and avoid disseminating limited subordination benefit theory. Instead, this Article proposes post-misconduct discounted claims purchasers be entitled to participate in the subordination benefit to the same extent as pre-misconduct claimholders.

If commentators and courts are unready to abandon both theories and if required to make a suboptimal binary choice, this Article suggests limited subordination benefit theory be propagated and utilized in lieu of subordination benefit elimination theory.

The full article is available here.