Bankruptcy Trusts and Future Claims

Abstract

Bankruptcy trusts consistently fail to protect the interests of future claimants as contemplated by Section 524(g) of the Bankruptcy Code. Although this reality is generally understood, the extent of this failure has not been examined. And, as demonstrated in this study, the degree to which trusts are failing future victims is greater than commonly realized. More than two-thirds of the trusts that have completed their initial claims processing are paying new asbestos personal injury victims at or near historically low rates, and several others appear to be defunct or inactive. Nearly two-thirds of the trusts that remain active have reduced payments since 2010, lowering the mean payment across trusts to a mere 14 percent of scheduled claim values, and others are in the process of reducing their percentages. This article examines the sources of this policy failure in the design of Section 524(g), the bankruptcy estimation process, and, ultimately, the trusts’ management and distribution procedures. All of the 32 trusts studied in this paper employ claim qualification criteria that are significantly lower than the tort system, and the trusts’ quality control and audit provisions are less stringent than other complex non-bankruptcy mass tort settlements. Yet new trusts consistently fail to account for the impact of these weaknesses on claim volumes and, accordingly, set payment rates at unsustainable levels. Thus, many trusts must ultimately reduce payment levels – often more than once – in order to avoid or postpone insolvency, leaving all future victims to receive only a fraction of the recoveries paid to the first wave of claimants. This article examines potential avenues for protecting future victims through requiring greater claim-level transparency, streamlining claim submissions and discovery, and adopting a cross-trust audit framework. This proposal demonstrates how bankruptcy trusts may take advantage of economies of scale to manage costs and improve quality controls, and it explains how a limited claim-level disclosure system can preserve claimant privacy while providing litigants, trusts, trust analysts and courts with sufficient data to improve the design and operation of existing and future trusts.