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Butler v. Mentor CorporationMentor Corporation successfully achieved a limited fund settlement of itsbreast implant litigation by means of a Rule 23(b)(1)(B) settlement classin 1993. It first engaged in negotiations with members of the plaintiffs’steering committee in the breast implant multidistrict litigation (MDL)proceedings. Mentor reached a settlement agreement before it initiatedthe class certification proceedings and thus was able to present withplaintiffs a joint application for class certification and approval of thesettlement to the court. The company benefited from the substantial efforts made by the MDL plaintiffs’ lawyers to explain and sell the settlement to breast implant plaintiffs’ lawyers around the country. The approval process was largely nonadversarial, and few objections were madeby members of the plaintiff class. In the end, the settlement provided forMentor’s payment of 25.8 million over a three-year period into a settlement fund. The fund was eventually distributed on a basis that required no proof of injury and drew no distinctions based on severity ofinjury.Fanning v. AcroMed CorporationIn 1997 AcroMed Corporation, a manufacturer of orthopedic bonescrews, achieved a Rule 23(b)(1)(B) class action settlement of the masstort litigation it faced, over the substantial opposition of a codefendantand several class members. After reaching agreement on the terms of asettlement with the MDL plaintiffs’ legal committee, AcroMed and thePlaintiffs’ Legal Committee (PLC) jointly sought certification of a limitedfund class and approval of the settlement. The court conducted a lengthyfairness hearing, at which the codefendant presented the testimony of anexpert who disputed the proponents’ evidence concerning the existenceof a limited fund. The court certified a plaintiff class pursuant to Rule23(b)(1)(B) and approved the settlement, relying in part on the testimony of the PLC’s expert that, freed of the tort claims against it, AcroMed would be worth 104 million. A few months later, the company wassold for more than three times that amount. One group of class membersapparently obtained a more favorable treatment than the rest of the classin exchange for agreeing to drop their appeals.2Mass Tort Limited Fund Class Actions & Bankruptcy Reorganizations

The Bankruptcy ReorganizationsIn re UNR Industries, Inc.Initiating one of the first mass tort bankruptcies, UNR Industries, Inc.filed a Chapter 11 petition in 1982 in order to obtain a resolution of itsasbestos liability. Because of the unprecedented nature of the bankruptcy,negotiations got off to a slow start. Among the issues that the debtor firstsought to resolve was its authority to include future claims in its reorganization plan and discharge. Once that issue was decided in UNR’s favor, the debtor left it up to the unsecured creditors’ committee, the asbestos claimants’ committee, and the future claims representative to negotiate the appropriate basis for dividing assets between commercialclaimants and asbestos disease claimants. Eventually the group arrived ata 1-to-2.27 ratio, which served as the basis for the reorganization plan.The parties then negotiated the share of equity that the shareholderswould be permitted to retain, agreeing on 8% of the reorganized company’s stock. The reorganization plan created a trust to pay asbestos disease claimants. The trust received a controlling share (63%) of the reorganized company’s stock, which at the time of distribution had a marketvalue of 150 million. The plan was confirmed consensually in 1989, allimpaired classes having voted overwhelmingly to approve it. Payouts bythe trust did not commence until late 1991.In re A.H. Robins, Inc.A.H. Robins, Inc. filed for bankruptcy in 1985, seeking to bring an end tothe litigation it faced which arose out of its manufacture and sale of abirth control device, the Dalkon Shield. With the active participation of adistrict judge, who withdrew the reference to the bankruptcy court as tomost matters, the debtor was able to obtain consensual confirmation of areorganization plan in 1988. Following the establishment of a bar date(the deadline for filing proofs of claim) for tort claims and the creation ofan extensive database concerning the nature of the claims that were filed,the district judge conducted an estimation hearing and established thevalue of the debtor’s tort liability at 2.475 billion. With the liabilitycapped at this amount, the company became more attractive to potentialbidders. Eventually the company was sold in accordance with terms thatwere acceptable to all constituencies. The purchaser provided the fundingfor a 2.3 billion trust for Dalkon Shield claimants, which ended up pay-Mass Tort Limited Fund Class Actions & Bankruptcy Reorganizations3

ing all of the tort claims in full (as determined by the trust’s resolutionprocedures, which encouraged settlement). Not only the debtor but alsoits officers, directors, successors, and insurers were released from anyfurther tort liability as a result of the bankruptcy.In re Eagle-Picher Industries, Inc.Following its unsuccessful effort to obtain a limited fund class action settlement of its asbestos liability, Eagle-Picher filed for bankruptcy in 1991.The proceedings moved slowly at the beginning, but the appointment ofa mediator to assist the parties in negotiating the terms of a plan eventually yielded results. The debtor was able to reach agreement with the asbestos claimants’ committee and the future claims representative over thevalue of the asbestos claims and the general terms of a reorganizationplan. However, the unsecured creditors’ committee refused to accept thatthe asbestos claims were ten times greater in amount than the commercial claims. Eventually this stalemate required a judicial estimation of thevalue of the asbestos claims. The bankruptcy court ended up estimatingthe claims to be worth 1 billion more than the amount the debtor andasbestos claimants had previously agreed to. Eventually, the unsecuredcreditors’ committee agreed to a compromise amount 500 million lessthan the court had estimated, and the plan was drafted on that basis. Under the plan, all of the stock of the reorganized company went to a trustcreated to pay the asbestos claims, and the existing shareholders receivednothing. Because the shareholders were deemed to reject the plan and theclass of unsecured creditors voted to reject it (owing to the negative votesof a few large creditors), the plan had to be crammed down (i.e., judicially approved over the objection of the rejecting classes). In 1996 thebankruptcy court, sitting jointly with the district court, confirmed theplan. Fifteen months later the trust sold the company for over 700 million.In re Dow Corning Corp.Dow Corning Corporation filed for bankruptcy in 1995, following its unsuccessful attempt in the MDL proceedings to arrive at a global settlement of its breast implant litigation. The company was able to use bankruptcy to consolidate the litigation against not only itself, but also its twoshareholders. Although the debtor never succeeded in getting a trial ofthe disease-causation issue in the bankruptcy or district court, it did4Mass Tort Limited Fund Class Actions & Bankruptcy Reorganizations

eventually reach an agreement with the tort claimants’ committee on theterms of a reorganization plan that they jointly proposed. Under the plan,Dow Corning was obligated to pay a maximum of 3.17 billion over sixteen years for breast implant claims, but the plan allowed the reversion tothe debtor of any funds not needed to satisfy the claims. Because threeclasses—commercial creditors, Norplant claimants, and governmentpayers—voted to reject the plan, it had to be crammed down. The bankruptcy court confirmed the plan in 1999, although it ruled that the planhad to be interpreted as preserving the claims against nondebtor partiesof breast implant claimants who had not voted to accept the plan. Thedistrict court affirmed the plan confirmation, but reversed the bankruptcy court’s interpretation of the release as being limited to acceptingclaimants.The Appendix to this monograph contains summaries of the keyfeatures of each of the cases studied.A Comparison of These Two Mass Tort ResolutionMethodsBased on the cases included in this study, in Chapter 2 I compare limitedfund class action settlements with bankruptcy reorganizations, focusingon four criteria: fairness of the resolution process, effectiveness of judicialreview of the resolution, efficiency of the resolution process, and likelihood that the resolution process will be invoked. I conclude that bankruptcy comes out ahead of limited fund class action settlements with respect to the fairness of the resolution process and the effectiveness of judicial review. The confirmation requirement of voting by individualcreditors (including tort claimants), the substantive bankruptcy protections for individuals and classes that vote against the plan, and the practice of appointing a future claims representative provide greater protection and opportunity for input for absent tort claimants than is availableto them when a district court approves a limited fund class action settlement. Moreover, tort claimants are treated more equitably in a bankruptcy reorganization with respect to the defendant’s other creditors, because all are forced to share the defendant’s shortfall; in a limited fundclass action settlement, only the tort claimants are forced to compromisetheir claims.Judges presiding over bankruptcy reorganizations also have the advantage of having specific statutory standards for the confirmation of theMass Tort Limited Fund Class Actions & Bankruptcy Reorganizations5

reorganization plan. The standards for determining whether a limitedfund class should be certified and whether a settlement should be approved, by contrast, remain ill defined. While neither method appears tohave an advantage when it comes to estimating the defendant’s total masstort liability, a difficult task regardless of the resolution method used,bankruptcy judges are likely to have more expertise than district judges indeterminin

The Bankruptcy Reorganizations, 3 In re UNR Industries, Inc., 3 In re A.H. Robins, Inc., 3 In re Eagle-Picher Industries, Inc., 4 In re Dow Corning Corp., 4 A Comparison of These Two Mass Tort Resolution Methods, 5 Chapter 1. Introduction, 7 Preparation of the Case Studies, 9 Structure of the Case