NEW YORK LAW JOURNAL SPECIAL REPORT

Litigation www. NYLJ.com Volume 260—NO. 10 Monday, July 16, 2018 A Field Guide To Channeling Injunctions And Litigation Trusts

Gary Svirsky, Tancred Schiavoni, Andrew Sorkin, and Gerard Savaresse ass-tort product liability cases are particularly difficult to Mresolve because there are few adequate procedural devices to ensure finality through settlement. Parties interested in resolving mass- tort litigation often overlook that channeling injunction protections are not just available to debtors. In many contexts, non-debtors too can benefit from the same channeling injunction protections as settling

non-debtors. SHUTTERSTOCK A court-approved channeling injunction can direct—or channel— tort claims to a litigation trust funded by participating parties. Claimants must then look exclusively to the efficient claims-evaluation process claims. Bankruptcy Code Section trust assets to satisfy their claims, that typically does not require the 105 (and Section 524(g) for asbestos which can provide­ them with an level of proof they would need to bankruptcies) grants a court broad satisfy in court. At the same time, powers to establish such trusts the channeling injunction and trust and issue injunctions that channel

Gary Svirsky and Tancred Schiavoni are litigation part- insulate debtors, certain non-debtor claims against debtor and non- ners at O’Melveny & Myers. Andrew Sorkin is counsel in the defendants, and other participants debtors with a sufficient unity of firm’s restructuring practice and Gerard Savaresse is an associate in the litigation department. from known current and future interest. Monday, July 16, 2018

As the chart below shows, this in its defenses, channeling injunctions non-debtors as of the injunction date device has been used in various cut off the costs of defending weak can be channeled. Future claims can mass-tort product liability cases, or bogus claims (which nevertheless also be channeled, which refers to ranging from diet pills to portable engender litigation costs). Similarly, claims based on injuries that may gas canisters, delivering finality channeling injunctions can help occur in the future: A defective not just to debtors but to others remove objectors, smoothing the way product may not cause injury for in the product’s distribution chain. for a more efficient bankruptcy. years, but if defects were to emerge Recently, this device was employed Payments can be structured in down the road, then any claims would in the Takata bankruptcy to channel different ways. Many mass-tort and be channeled. injuries alleged from defectively asbestos bankruptcies have used There are, however, jurisdictional manufactured car airbag inflators: economists to estimate funding levels limitations on the bankruptcy court’s ability to channel claims against Case Product Protected Non-Debtor non-debtors. The claims against Takata Air Bag Inflators Automakers non-debtor must be “related to” the Blitz Gas Cans Private Equity Investors, Retailers, Insurers Chapter 11 case, requiring “unity of Delaco Diet Pills Drug Vendors, Distributors, Insurers interest” between debtor and non- Dow Corning Breast Implants Doctors, Distributors debtor third parties. See 28 U.S.C. In many of these cases, the protected for future claims. That invariably leads §1334(b); In re Combustion Eng’g, non-debtor’s alleged liability derived to intra-expert battles. The Takata Inc., 391 F.3d 190, 230 (3d Cir. 2004), from the debtor’s, and its contribution bankruptcy avoided this through a as amended (Feb. 23, 2005). Courts to a settlement fund was important pay-as-you-go trust. While defendants have found unity of interest when to the bankruptcy. These criteria did not get the comfort of an aggregate a judgment against the non-debtor are not as limiting as may at first liability cap, they received other would without further process result appear. Blitz, for instance, presents benefits (such as efficient claims in debtor liability, such as when there a model for retailers sued based on resolution and specified claims is a contractual indemnification a manufacturer’s defective product, values) and eliminated the need for obligation to the non-debtor. See W.R. while Delaco offers an example a complex and expensive bankruptcy Grace & Co. v. Chakarian, 386 B.R. for defendants caught up in failed trial featuring dueling economists and 17, 34–35 (Bankr. D. Del. 2008); see drug litigation. See In re Biltz U.S.A., other assorted experts. also Pacor v. Higgins, 743 F.2d 984, 11-13603, (Bankr. D. Del., Jan. 30, 2014); Plaintiffs too benefit from channeling 995 (3d Cir. 1984) In re The Delaco Co., 04-10899, (Bankr. injunctions. Critically, a channeling Not all claims must be channeled, S.D.N.Y. Feb. 17, 2006). injunction allows plaintiffs to recover and not all defendants must quickly, without protracted litigation, participate. Claims that are not Pros and Cons of Plaintiffs and proof requirements, or personal included in the trust (or, in debtor’s Defendants Participating in a Trust testimony. Channeling injunctions also case, not discharged) could pass Channeling injunctions come with make it easier for claimants to pursue through bankruptcy unimpaired strong potential upside for product low-value claims that are difficult to and back into the tort system. For liability defendants and plaintiffs alike. prove in court. This can be especially example, the Takata plan channeled For defendants, the injunctions buy useful in allowing tort committees to only personal injury and wrongful certainty, fixing claim values and deliver value to their constituents— death claims against automakers eliminating the risk of runaway jury and plaintiffs’ lawyers—without while letting economic loss claims awards or punitive damages. They also estate-depleting litigation. continue in the tort system. See In protect against future risk. Because re TK Holdings, 17-11375-BLS, Dkt. the injunction can funnel future claims What Kinds of Claims Can be No. 2120, (Bankr. D. Del. Feb. 21, to the trust, participants can avoid Channeled? 2017). Nor must all tort defendants being blindsided by unforeseen claims. Claims that have been alleged participate. Non-debtors can opt out Even if a tort defendant is confident against both debtor and qualifying of the trust and take their chances in Monday, July 16, 2018 court. But for the trust to be worth identity of trustee(s) or and claims debtor’s claim exposure. Further, a pursuing there should be a critical processor. Typical procedures court cannot approve an injunction mass of participating defendants, require plaintiffs to assert a claim to that unlawfully impairs rights of with involvement from defendants establish several specified criteria, parties that may not vote on the with the highest exposure often a must which the administrator would then channeling injunction, e.g. insurers’ for building consensus with plaintiffs. evaluate. There is no adversarial contribution, indemnification, claim testing or supporting reimbursement, or subrogation Getting the Trust Up and Running evidence. The administrator applies rights may not be impaired. See In re While it is possible to confirm a non- the pre-approved TDPs to assess Pittsburgh Corning Corp., 453 B.R. 570, consensual channeling injunction, to the claim value and then pays out 611 (Bankr. W.D. Pa. June 16, 2011). channel claims against a non-debtor accordingly. Therefore, some claims it is best to proceed consensually. So that would typically not get paid in Final Thoughts a first step is to get all stakeholders the tort system could recover from Channeling injunctions are not to the table. This includes debtors, the trust. a panacea. Some product liability participating non-debtors, tort With a trust structure in place, the defendants may decide that the claimants or their committees, parties look to the court to bind future required contribution is too high insurance carriers with implicated claimants. Even a consensual trust and they may be willing to take and channeling injunction must pass whatever risks come in the tort muster with the bankruptcy court. system. Participating in a trust may A court-approved channeling Usually, channeling injunctions and also signal that there is a problem injunction can direct—or chan- trusts are embodied in a reorganization with defendants’ product (even if plan and considered as part of the that is not the case), which could nel—tort claims to a litigation confirmation process. In deciding send a bad message to customers, trust funded by participating whether to approve third-party shareholders, lenders, suppliers, or parties. This device has been releases and channeling injunctions, regulators. In some cases, simply used in various mass-tort prod- courts generally consider some discussing a trust can sound like a uct liability cases, ranging from variant of the five factors articulated dinner bell to plaintiffs attracted by in In re Master Mortgage Investment what they may regard as easy money. diet pills to portable gas can- Fund, including whether (i) there is At the same time, injunctions are isters, delivering finality not just identity of interest between the debtor another option for resolving mass- to debtors but to others in the and third party, (ii) the third party tort claims and can provide the sort product’s distribution chain. made a substantial contribution to the of certainty that a business needs. trust, (iii) the injunction is essential It can create the closure similar to policies, and the court-appointed to the bankruptcy, (iv) the impacted that resulting from an approved future claimants’ representative (or creditors support the injunction, settlement with a certified class. But FCR). and (v) the plan provides for paying at a cost. Product liability and tort There are many issues to negotiate, substantially all claims. 168 B.R. 930, defendants should carefully consider but the following are foundational: 935 (Bankr. W.D. Mo. 1994); see also whether a channeling injunction is (i) trust distribution procedures (or In re Zenith Electronics, 241 B.R. 92 the best solution, and work closely TDPs) that set out the payment (Bankr. D. Del. 1999). with experienced counsel to generate criteria, values, and process for While channeling injunctions alternatives, such as opt-ins and pay- evaluating claims; (ii) terms of offer an opportunity to fix or limit a as-you-go mechanisms. the trust and funding sources; (iii) non-debtor’s exposure to mass-tort the channeling injunction’s scope, liability, they are not a windfall—one which specifies the claims that should assume that the “substantial Reprinted with permission from the July 16, 2018 edition of the NEW YORK LAW will be channeled; (iv) the breadth contribution” could be pegged to the JOURNAL © 2018 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 of third-party releases; and (v) estimated value of a solvent non- or [email protected]. # 070-07-18-18