A Dilemma In Mass Tort Bankruptcies: Maximizing Value v. Wreaking Vengeance (In re Bestwall)

By: Donald L Swanson

Bankruptcies with large tort claims are common:

• some involve a limited number of claimants (e.g., a drunk driver hits a bus or a restaurant serves bad food one evening); and
• others have large numbers of claimants, some of whom won’t even be known for at least another decade (e.g., asbestos cases).

Often in tort bankruptcies, the total amount of claims overwhelms the debtor’s ability to pay: i.e., existing assets, insurance coverages and projected future income streams are, simply, insufficient.

Claimant’s Dilemma

In such circumstances, claimants often face a dilemma.  Do they want:

• to wreak vengeance upon the debtor (e.g., by putting debtor out of business and taking whatever remains of debtor’s assets); or
• to maximize debtor’s ability to pay their claims (e.g., by allowing debtor to continue in business with profitable operations).

Most claimants want both: to simultaneously wreak vengeance and maximize value. 

But the reality is, typically, this: they can’t have both.  They have to choose.  The choice is either vengeance or value.  It’s the claimant’s dilemma.

History shows that claimants, when faced with this dilemma, will:

• start by wanting and demanding vengeance; but
• ultimately, choose to maximize value—i.e., to get as much money as possible, as soon as possible, on their claims.  

Evidence of this choice, in the dilemma, is from all mass tort bankruptcies where large majorities of claimants (e.g., >85%) vote to accept debtor’s bankruptcy plan.

In re Bestwall, LLC

When confronted with the claimants’ dilemma, bankruptcy courts and their appellate overseers tend to choose maximizing value over vengeance—even in circumstances where those still focused on vengeance are crying, “Abuse!!”

An example is a case before the U.S. Supreme Court on petition for writ of certiorari from the Fourth Circuit Court of Appeals: Official Committee of Asbestos Claimants v. Bestwall LLC.[Fn. 1]

In Bestwall, Debtor had engaged in pre-bankruptcy manipulations of its corporate structure so that, (i) the operating entity could stay out of bankruptcy and continue profitable operations, and (ii) a related entity could file the Chapter 11 case.

Those seeking vengeance declare such actions to be an abusive manipulation.  But get this: all three courts below the U.S. Supreme Court (i.e., the Bankruptcy Court, the U.S. District Court, and the Fourth Circuit Court of Appeals[fn. 1]) reject the cries of abuse and allow the case to proceed, and they provide the injunctive relief requested by Debtor against further tort litigation.

How can this be?!

How could those courts do such a thing?! 

Here’s how, as explained by the Fourth Circuit Court of Appeals in its In re Bestwall, LLC, opinion:

• the purpose of the corporate restructuring is to:
  • maximize Debtor’s value for claimants by “utiliz[ing] section 524(g) of the Bankruptcy Code without subjecting the entire Old GP enterprise to chapter 11”; and
  • promote “the equitable, streamlined, and timely resolution of claims in one central place compared to the state tort system, which can and has caused delays in getting payment for legitimate claimants”;
• “a chief purpose of the bankruptcy laws is to secure a prompt and effectual administration and settlement of the estate of all bankrupts within a limited period”; and
  • “when Bestwall filed for bankruptcy in 2017, of the 64,000 pending asbestos-related claims, seventy-five percent had been pending for ten years or more, and fifty-five percent had been pending for fifteen years or more”;
• “the main interference with the timely resolution of the claims in Bestwall’s bankruptcy proceeding appears to be Claimant Representatives’ challenge to the preliminary injunction”; and
  • “It is not clear why Claimant Representatives’ counsel have relentlessly attempted to circumvent the bankruptcy proceeding”; but
  • “aspirational greater fees . . . is not a valid reason to object to the processing of the claims in the bankruptcy proceeding.”

Conclusion

I know.  I know.  Cries of “abuse” are easy to make and are often persuasive, without delving into the details at work in the bankruptcy process.

Here’s hoping the U.S. Supreme Court will recognize the legitimacy of what the three courts below it have concluded in the In re Bestwall case!

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Footnote 1.  The In re Bestwall, LLC, case: (i) began in the North Carolina Bankruptcy Court, Western District, with an approval of the pre-bankruptcy corporate machinations and a grant of supporting injunctive relief (see In re Bestwall, LLC, 606 B.R. 243 (Bkrtcy.W.D.N.C. 2019)), (ii) resulted an affirmance by  the U.S. District Court for the same district (see In re Bestwall, LLC, 2022 WL 68763, Case No. 3:20-cv-105)), (iii) resulted in a second affirmance—this time by the U.S. Court of Appeals for the Fourth Circuit (see In re Bestwall, LLC, 71 F.4th 168 (4th Cir. 2023)), and (iv) is pending before the U.S. Supreme Court on a Petition for writ of certiorari at Case No. 23-675.

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