the Question about Mass Bankruptcy Law?

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Q. The second question—how to divide the pie—is the same in mass tort cases as in most Chapter 11 cases. Even if it is clear that the company owes the money, it may not have the resources to pay everyone in full. Non-bankruptcy law is a race of the diligent, permitting the first creditors on the scene to collect in full, leaving nothing for the later creditors. Bankruptcy law, by contrast, halts payments to the early tort claimants—and to all other creditors—while the debtor works with everyone to develop a plan to pay a similar distributional share to each claimant. No doubt the first claimants lose; they are unable to collect their jury verdicts in full and without delay. But because bankruptcy law focuses on all the claimants, what the early claimants lose is preserved for the later claimants who did not rush to the courthouse as quickly. A finer distributional question lurks in the mass tort cases as well: the distribution of payment between injured parties and their lawyers. Because Chapter 11 may establish compensation procedures that do not require an attorney, some people will be compensated without sharing their recoveries with lawyers. A trust may also compensate the lawyers directly, limiting their recovery and effectively rewriting the terms of the agreement between lawyer and client. While nearly all people except lawyers usually favor cutting lawyers’ fees, the last point demonstrates the dynamic impact of a bankruptcy resolution. If lawyers understand that in mass tort cases they may pursue difficult and expensive suits, only to see the company file for bankruptcy and force limited, pro rata recoveries on them, their enthusiasm for such cases may diminish. Similarly, if a company understands that it can deal with thousands of lawsuits scattered around the country in a single forum if it files for bankruptcy, it may not agree to an unfavorable settlement of those suits. Bankruptcy rules cast a long shadow on decisions made by parties who may never find their way to the bankruptcy courthouse.

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