Mass Tort Litigation Versus Bankruptcy: Trial Lawyers' Hidden Agenda

Do you know why trial lawyers prefer mass tort litigation versus bankruptcy? It’s because they stand to make a lot more money through litigation than if claims go through the bankruptcy…

Do you know why trial lawyers prefer mass tort litigation versus bankruptcy? It’s because they stand to make a lot more money through litigation than if claims go through the bankruptcy system—even though the bankruptcy system is more efficient. Trial lawyers use mass tort litigation in the hopes of overwhelming businesses and forcing settlements, while claimants often get less money than expected due to excessive legal fees, unfair distributions, or even in some cases outright theft

A recent Wall Street Journal editorial describes how an appellate court denied one company the ability to file bankruptcy and resolve tens of thousands of talc cases. According to a three judge panel of the third circuit, a company may only use bankruptcy to address tort claims if its financial collapse is imminent, even if it’s faced with crushing numbers of lawsuits with no ability to predict what it will ultimately cost to resolve them in court. In effect, the court dinged the company for having too much money today, even if it’s likely to spend tens of millions, or even billions, of dollars defending itself. If companies are forced to stay in litigation until they’re bled dry, rather than allowed to resolve mass torts through bankruptcies, claimants will get less money. Trial lawyers will take huge fees from today’s claimants, and there won’t be money left for future claimants. As the editorial observes, by the time a company is completely insolvent, “the trial lawyers are rich, and the claimants are left with scraps.” 

The bankruptcy system is an orderly, effective, and appropriate alternative to mass litigation. In a bankruptcy process, claims are combined in a single forum. Assets are collected so they can be used to compensate legitimate claimants. A neutral judge evaluates the claims and serves as an umpire, calling balls and strikes to ensure the process is fair and that deserving claimants are paid what they’re owed. 

According to ILR’s research, Unlocking the Code: The Value of Bankruptcy to Resolve Mass Torts, many bankruptcy cases result in the creation of a trust fund that compensates current and future claimants and ends any related lawsuits. These trust funds are often able to handle claims more quickly than they could be resolved in the courts, getting deserving individuals money in a more timely manner. The paper cites a federal bankruptcy judge who explained that “[g]iven the pace of the litigation to date, as well as the mounting escalation in the number of new actions being brought monthly, the vast majority suffering from illness in the existing backlog of cases will not see a penny in recovery for years. The tort system has struggled to meet the needs of present claimants in a timely and fair manner. The system is ill-equipped to provide for future claimants.”  

Not only does the bankruptcy system allow for more timely and fair payments to claimants, but it also works to ensure that money goes to claimants rather than litigation costs and expenses. ILR’s bankruptcy paper reviewed dozens of trusts’ annual disclosures and found that the settlement trust system spends about 8.5 cents on operational and administrative expenses for every dollar in net claim payments. Compare that to the high price tag of the U.S. tort system. Another ILR research study, Tort Costs in America: An Empirical Analysis of Costs and Compensation of the U.S. Tort System, concluded that 47% of every dollar paid into the tort system goes towards litigation costs and other expenses.  

What does this mean? Here’s the breakdown: 

Bankruptcy system = claimants receive more money, faster from a well-designed bankruptcy trust. 

Lawsuit system = slow and expensive, leaving less money for claimants.  

In the mass tort litigation versus bankruptcy debate, businesses also get swindled in mass tort litigation because they spend more on litigation costs than if the settlement money was put into a bankruptcy trust. The only ones celebrating are the trial lawyers.