Sydney Law Review
|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Sydney Law Review |
|
PETA SPENDER[*]
Mass torts give rise to complex legal questions and invidious moral choices. The asbestos litigation has shown that corporations manufactured asbestos decades after its dangers had been publicly recognised. Later, when faced with spiralling claims, firms in the US such as Johns-Manville were permitted to use bankruptcy procedures without proving insolvency thereby forcing tort claimants into a limited fund. In the late 1990s asbestos defendants sought wider powers to collectivise the claims through class actions although this attempt was ultimately unsuccessful. This article provides case studies of US firms and shows that similar strategies are now being adopted in Australia and the UK.
Certain privileges flow from bankruptcy such as the moratorium on claims and the right to distribute entitlements pro rata. However, in the context of mass torts these privileges have frequently led to under-compensation of tort victims, wealth transfers to shareholders and bewilderment about how to protect future claims. The article will explore these problems and consider how they may be ameliorated by effective monitoring.
‘James Hardie Industries yesterday took its biggest step yet in shedding the baggage of the past by quarantining almost $300 million in current and future asbestos liabilities to allow it to focus on its international ... operations. [Due to] the plan to create a “foundation” to take its asbestos liabilities off its balance sheet ... James Hardie will no longer bear any costs associated with asbestos. While there remains some doubt about James Hardie’s ability to stave off any future liabilities, $72.4 million in asbestos provisions will be removed from the company’s balance sheet in favour of the foundation and no future provisions are expected. The move was welcomed by investors, who pushed the shares 17c higher to $3.80.[1]’
‘Mr Gerry Gardiman of law firm Turner Freeman ... is suspicious of the offer. “My concern would be what happens to the victims when the $293 million runs out?” he said.’[2]
The purpose of this article is to examine corporate responses to mass tort[3] liability. The article will explore techniques used by defendants to aggregate tort creditors through bankruptcy[4] and class actions to reduce compensation.
Mass tort liability is generally very large, involves high transaction costs and in the case of long-tail torts[5] may extend over decades and may threaten the viability of the defendant enterprise. It creates incentives for corporations to minimise payouts to tort creditors. Although there are many examples of mass torts due to defective products,[6] asbestos liability is an archetypal example and it will form the subject matter of this article.[7]
This article sets out to do a number of things. First, it will provide a narrative of the asbestos litigation featuring defendants in the US, Australia and the UK. Judgments for personal injury and death caused by exposure to asbestos have been occurring in Australia and the US[8] since the late 1970s. Since then the volume of asbestos claims continues to spiral, surpassing most predictions.[9]
The second purpose is technical — the article will detail the positive law relied upon by defendants to aggregate and under-compensate asbestos victims, primarily via corporate law and civil procedure. A number of US firms have used reorganisation under Chapter 11 of the US Bankruptcy Code. The use of reorganisation in this context challenges traditional bankruptcy norms because the firms involved are not necessarily insolvent, yet they are able to allocate a pool of funds from which the tort creditors’ claims must be satisfied. Part Two of the article will examine the history of one of the largest US manufacturers of asbestos, the Johns-Manville Corporation, the evidence of its complicity in the concealment of the dangers of asbestos and the reaction to its Chapter 11 filing.
Mandatory class actions will be considered in Part Three of the article. Although many US firms managed their mass tort liability with the use of Chapter 11, other defendants attempted to use mandatory settlement class actions under the US Federal Rules of Civil Procedure (‘FRCP’) to achieve a wider aggregation and discharge. The discharge is effected by operation of res judicata which arises upon certification of the class action. A similar role may be played by allocating a ‘limited fund’[10] which must be apportioned amongst the members of the class.
Part Four will examine the application of this issue to Australia where one asbestos defendant has set up a limited fund ‘in order to absolve itself for all liability with respect to future asbestos claims’[11] and another has been party to several settlement class actions. The final case study in Part Five will investigate the circumstances leading up to the administration order made in October 2001 over T&N Ltd, which was the largest British manufacturer of asbestos. The administration order flows from the Chapter 11 filing of T&N’s US parent, Federal-Mogul, who acquired T&N in 1997.
The third purpose of the article is normative. Part Six will attempt to tease out the dilemmas created by these corporate responses to mass tort liability. This analysis will weigh up the right of corporations to defray enterprise-threatening liability through aggregating devices with the obligation of the tort system to achieve corrective justice and individual compensation. The article will conclude with a critical examination of the ‘golden egg’[12] arguments raised by corporations in this context.
>From the 1920s until the 1970s Johns-Manville was both the largest manufacturer and the largest supplier of asbestos products in the United States.’[13] As early as 1933, litigation by 11 employees alleging injuries caused by exposure to asbestos placed the company on formal notice of the health risks for workers.[14] According to the minutes of a board of directors meeting on 24 April 1933, the suits were settled by Johns-Manville on the express condition that the plaintiffs’ attorneys would not bring similar claims against the company in the future.[15]
Correspondence produced on discovery in a South Carolina case included letters about the suppression of publication of articles in Asbestos magazine at the direction of industry executives. According to Judge James Price:
[T]he correspondence reveals... that Raybestos-Manhattan and Johns-Manville exercised an editorial prerogative over the publication of the first study of the asbestos industry which they sponsored in 1935.... [It] further reflects a conscious effort by the industry in the 1930s to downplay, or arguably suppress, the dissemination of information to employees and the public for the fear of promotion of lawsuits.[16]
Asbestos workers began forming unions and the presence of unions facilitated the transition from individual workers reporting asbestos-related injuries to the extensive epidemiological data available today. Unions also provided workers with access to lawyers who developed an expertise in the area. Although the early cases were often unsuccessful, as plaintiff lawyers developed further evidence and expertise, there was a sudden explosion of asbestos litigation.[17]
By 1982 the pace of litigation against Manville had increased to an average filing of three cases per hour, every hour of the business day.[18] The company projected its total asbestos liability at more than $1 billion.[19] On 26 August 1982, Manville Corporation filed for reorganisation under Chapter 11 of the US Bankruptcy Code.
Despite this massive contingent liability, Manville was clearly not insolvent. The Wall Street Journal pointed out that Manville was ‘far from broke’ and in fact was financially strong. The company ran a series of full-page advertisements in the Wall Street Journal that, despite the filing, proclaimed its financial strength.[20]
In the advertisements, Manville declared to the world, ‘[n]othing is wrong with our businesses.’[21] The company did not need to ‘fudge or falsify’ the allegations of its financial strength because the Bankruptcy Code had been amended in 1978 to remove any requirement for a voluntary petitioner to be insolvent or unable to pay its debts as they fell due. Kennedy stated:
This seemed a glaring gaffe to a number of commentators on the legality of the filing, but voluntary relief under the bankruptcy laws has long been available without the bootless expenditures of time and money to determine whether the debtor was in sufficiently dire financial straits to require or deserve bankruptcy relief.[22]
The 1978 amendments had effected what Zipes has called ‘bankruptcy’s paradox’, that is, that the debtor need not be insolvent to gain the finality of discharge.
A debtor’s ability to repay debts in whole or in part is not adequate cause for dismissal of a case under the Bankruptcy Code. Until a debtor proposes a plan, it is too speculative to conclude that reorganisation is not in the best interests of the debtor and debtor’s creditors simply because the debtor is solvent. Further, if a debtor is able to fully recover after confirmation of a plan, perhaps becoming wildly successful, it has no duty to pay pre-petition creditors.[23]
By 1991, 11 of the 25 major asbestos manufacturers had sought bankruptcy protection. These bankruptcies were controversial because their novel premise was that the corporation was entitled to bankruptcy protection not because it was insolvent, but because continuing trends in asbestos litigation made a bankruptcy reorganisation the best way to manage the payment of present and future claims.[24]
The Manville Plan of Reorganisation provided for the creation of a trust that was designed to satisfy fully Manville’s asbestos-related liability. During the six years of bankruptcy, no asbestos-related claims were paid. Upon the approval of the plan in November 1988, the trust became the exclusive entity from which tort creditors could seek compensation for injuries caused by exposure to Manville’s asbestos products. An injunction insulated the Manville Corporation from any asbestos related liability.[25]
Shareholders retained 20 per cent of the equity in the company,[26] which although low, still offends bankruptcy priorities.[27] Commercial creditors were granted full payment on the monies owing to them and a package of shares, warrants and bonds in lieu of interest.[28] The uncertainty of the tort claims was replaced by a ‘compensation board system’.[29] A bankruptcy judge, Lifland J, commented:
[T]he Trust is guaranteed an ‘evergreen’ source of funding. This funding of the Trust will continue until the last asbestos victim is found and paid. Thus an effort to determine the number and amount of [asbestos] claims with exactitude is not imperative. The imperative rather, is to ensure to the greatest degree possible the continuing viability of the reorganised corporation, which will fund the Trust, whatever the number and amount of claims happen to be.[30]
Within two years of commencing operation the trust was out of funds.[31] It was necessary for the company to restructure again and this time it used a class action device by declaring the fund allocated under the Chapter 11 reorganisation as a ‘limited fund’. This device will be discussed shortly. Ultimately the value of the fund declined so that now claimants are paid 5 per cent of the liquidated value of their claims.[32]
[T]he class action has landed like a 600-pound gorilla in the arena of tort reform, where there has of late been increasing interest in replacing tort litigation with scheduled benefits like those provided in these class action settlements. One reaction to using class actions to accomplish this reform might be ‘They can’t do that, can they?’[33]
By 1990 in the US, judicial concern about the problems caused by the asbestos litigation and the long-term financial viability of defendants led to the establishment of an ‘ad hoc nationwide coordinating committee’ to resolve the asbestos case load crisis through case consolidation and management. The report of the Ad Hoc Committee on Asbestos Litigation in 1991 concluded that ‘this litigation impasse cannot be broken except by aggregate or class proceedings’. The report also urged a national system for resolving asbestos claims to ‘ensure uniform consistent recovery to claimants’.[34] Later that year eight federal district judges petitioned the Judicial Panel on Multidistrict Litigation (JPML) to consolidate all asbestos personal injury cases in the federal system into a single forum.[35] The JPML transferred all pending personal injury asbestos cases to Judge Charles R Weiner of the Eastern District of Pennsylvania, who resisted plaintiff attempts to transfer matters back. As a result, plaintiff firms became more receptive to the idea of a global settlement.
Then, in what has been described as ‘a surprising development’, the largest industry consortium of defendants (CCR) approached two large plaintiff firms to negotiate a separate settlement with their firms covering ‘all future personal injury claimants in the United States who had been exposed to asbestos’.[36] The next step, according to Coffee, was ‘even more extraordinary’. In January 1993, the two sides simultaneously filed the complaint, the answer, a joint motion for class certification and a settlement in Georgine v Amchem Products, Inc in a federal district court.[37] In other words, they had devised a global settlement and were simultaneously filing the complaint and the settlement in order to obtain class certification. Class certification was sought in order to attain the benefit of res judicata[38] which would preclude those covered by the settlement and certification from bringing a claim. Thus the coverage of the settlement was critical; and amazingly the settlement was framed to catch all future claimants. In August 1994 Judge Reed issued an order that certified the class action under Rule 23(b)(3) FRCP and approved the proposed settlement as fair and adequate.[39]
The court enjoined all class members from ‘initiating or maintaining any asbestos-related personal injury or death claim(s) or lawsuit(s) against any CCR defendant’ except as expressly permitted by the Stipulation of Settlement.[40]
Shortly after the Amchem settlement was certified, but before it was scrutinised by the US Supreme Court (which will be discussed later), the case of Ahern v Fibreboard was filed.[41] Ahern was similar to Amchem but it is more pertinent to the arguments in this article.
Fibreboard was a long-term subsidiary of Louisiana Pacific Corporation which had been spun off by its parent as an independent publicly owned company in 1988 at a point when its potential insolvency due to asbestos liabilities was already a clear danger.[42] By that time, over 50 000 asbestos-related actions had been filed against Fibreboard.[43] Fibreboard began negotiating with plaintiff firms to secure a global settlement. In December 1992, Fibreboard and the large plaintiff firm Ness, Motley reached an inventory settlement covering approximately 20 000 existing asbestos personal injury claims. Pursuant to this agreement, Ness, Motley agreed to recommend the settlement provisions to future claimants that it represented. The class action was filed on 9 September 1993 and on the same day Parker J certified, for settlement purposes only, a future class of persons with asbestos-related personal injuries who had not already asserted such claims against Fibreboard. His Honour appointed Ness, Motley to act as negotiating counsel for the future claimants even though they were also acting for present claimants.[44]
The most interesting part of the certification was Parker J’s decision to certify the class as a mandatory class under Rule 23(b)(1)(B) FRCP.[45] Under the settlement, Fibreboard’s two principal insurers had deposited $1.525 billion into a trust fund for future claimants but Fibreboard contributed only $500 000. Coffee commented that ‘this token contribution might be understandable if Fibreboard were otherwise insolvent, but, apart from its asbestos liabilities, Fibreboard appears to be a thriving company.’[46] Expert opinion at the hearing valued Fibreboard’s assets at between $230–$300 million.[47]
Certification of an action as a mandatory class has the practical effect of denying class members the right to opt out. Moreover, the finding of a limited fund allows defendants to limit tort creditors to an asset pool, which must necessarily be allocated pro rata. Such a result would generally flow from bankruptcy,[48] but not where the company is solvent. In the result, Fibreboard’s share price increased by over 300 per cent above its highest closing price in the month before the settlement. Coffee expressed the unfairness succinctly: ‘Such a dramatic stock price movement suggests that there has been a wealth transfer. Fibreboard’s shareholders have gained, and its tort creditors ... have lost.’[49]
[W]e do need to recognize the tension between the limited fund class action’s pro rata distribution in equity and the rights of individual tort victims at law.[50]
Amchem and Fibreboard were both appealed to the US Supreme Court. In Amchem Products, Inc v Windsor [51] the court sharply circumscribed the use of mandatory settlements in mass tort litigation and found that the ‘sprawling class’ which had been certified by the District Court in that case did not satisfy the requirements of Rule 23 FRCP.[52] In Ortiz v Fibreboard,[53] the court rejected the company’s limited fund settlement and reversed the grant of class certification for the purpose of a global settlement. The court found that the petitioners had failed to demonstrate that the fund was limited except by the agreement of the parties and that the fund lacked the structural protections of the FRCP.
The majority judgment in Ortiz [54] found that when the US Federal Civil Rules Advisory Committee was drafting Rule 23(b) FRCP in 1966, they sought to catalogue ‘in functional terms those recurrent life patterns which call for mass litigation through representative parties’. Rule 23(b)(1)(B) FRCP covered ‘situations where lawsuits conducted with individual members of the class would have the practical if not technical effect of concluding the interests of the other members as well, or of impairing the ability of the others to protect their own interests’.[55]
Among the traditional suits encompassed by Rule 23(b)(1)(B) FRCP were those involving property which needed to be distributed among a class or liquidated to provide payments to members of a class. One example was where claims were aggregated against a fund insufficient to pay all claims, that is, a limited fund.[56] Classic limited fund class actions ‘include claimants to trust assets, a bank account, insurance proceeds [and] company assets in a liquidation sale’.[57]
The majority in Ortiz found that a limited fund has the following characteristics:
1. The totals of the aggregated liquidated claims and the fund available for satisfying them, set definitely at their maximums, demonstrate the inadequacy of the fund to pay all the claims. ‘The concept driving this type of suit was insufficiency, which alone justified the limit on an early feast to avoid a later famine.’[58]
2. The whole of the inadequate fund was to be devoted to the overwhelming claims.
3. Third, the claimants identified by a common theory of recovery were treated equitably among themselves. The cases assume that the class will comprise everyone who might state a claim on a single or repeated set of facts, invoking a common theory of recovery, to be satisfied from the limited fund as the source of payment.
Overall, mandatory class treatment through representative actions on a limited fund theory was justified ‘with reference to a ‘fund’ with a definitely ascertained limit, all of which would be distributed to satisfy all those with liquidated claims based on a common theory of liability, by an equitable, pro rata distribution’.[59]
This looks very much like a description of bankruptcy or a Chapter 11 reorganisation and demonstrates the functional equivalence between the two procedures. This is particularly the case where certification is sought under Rule 23(b)(1)(B) FRCP because there is no opportunity for members of the class to opt out of the proceedings. The opt-out power has been a significant sweetener to allay the due process concerns raised by class actions. Removal of this option brings the class action process very close to bankruptcy proceedings. This was recognised by the majority judgment, which quoted Monaghan as follows: ‘No draftsmen contemplated that, in mass torts, (b)(1)(B) “limited fund” classes would emerge as the functional equivalent to bankruptcy by embracing “funds” created by the litigation itself.’[60]
The Supreme Court rejected this functional equivalence. The first basis was the poor fit between the original concept of the limited fund and that which was being argued by Fibreboard. The majority quoted Amchem, emphasising that the ‘rules of procedure “shall not abridge, enlarge or modify any substantive right”’.[61] Importantly the limited fund was not to be used to effect a pro rata distribution to tort victims.
However, the major justification for the rejection of functional equivalence was procedural, that is, constitutional due process rights. First, the certification of a mandatory class followed by settlement of its action for money damages jeopardises the Seventh Amendment jury trial rights of absent class members.[62] Secondly:
and no less important, mandatory class actions aggregating damage claims implicate the due process ‘principle of general application in Anglo-American jurisprudence that one is not bound by a judgment in personam in a litigation in which he [sic] is not designated as a party or to which he has not been made a party by service of process,’ (Hansberry v. Lee[1940] USSC 116; , 311 US 32) ... , it being ‘our “deep-rooted historic tradition that everyone should have his own day in court,”’ (Martin v. Wilks)[1989] USSC 153; , 490 US 755, 762.... Although we have recognized an exception to the general rule when, in certain limited circumstances, a person, although not a party, has his interests adequately represented by someone with the same interests who is a party.... [T]he burden of justification rests on the exception.[63]
In the result, the Supreme Court found that the respondents had not satisfied their ‘burden of justification’, stating that it had raised due process concerns a decade earlier in Phillips Petroleum v Shutts[64] when the court had stated that an absent class member’s right of action was not extinguishable unless due process requirements were complied with.
No one has a reliable estimate of how many tens of thousands of asbestos disease cases ... have already occurred in Australia.... World authority on asbestos mortality, Professor Douglas Henderson ... has estimated Australia will see about 13,000 cases of mesothelioma by 2020, and another 30,000 to 40,000 cases of asbestos-related lung cancer.[65]
We have already witnessed a range of corporate responses to asbestos liability in Australia. The most common has been the use of separate legal personality. Australian asbestos manufacturers arranged their corporate groups after the dangers of asbestos had already been recognised overseas. Therefore, from its inception, the mining and manufacture of asbestos in Australia tended to be conducted by the undercapitalised subsidiaries of firms. The following discussion will focus on the two major private sector defendants — CSR and James Hardie Industries.
(i) James Hardie Industries
James Hardie opened its first Australian asbestos factory in 1916. Although the dangers of asbestos were documented in the US and the UK before the 1920s, the first known death of a Hardie employee due to asbestos occurred about 1960.[66] In 1964 a safety officer employed by the company wrote a long memo to senior management warning that ‘asbestos dust is one of the most dangerous of all industrial poisons’. Although James Hardie experimented with fibres to replace it, asbestos was far more profitable.[67] The first asbestos compensation claims were filed against CSR and James Hardie in 1977.[68] However, Hardie did not stop manufacturing asbestos until 1987. It is estimated that approximately 2000 claims have been made against James Hardie by the beginning of 2001.
By 1998, Hardie was interested in listing on the New York Stock Exchange. It sold its core businesses to a Dutch-based company in order to ‘maximise the tax benefits to shareholders’.[69] A new holding company, James Hardie NV, was created ‘to hold all core assets with asbestos liabilities left in the Australian company’. The plan was for Hardie’s Australian shareholders to own 85 per cent of NV and the remaining 15 per cent to be offered to new US investors in the US float.[70] However, even after the ‘troublesome asbestos liabilities [had] been left behind in the Australian-listed vehicle’ there was weak demand on the US market for the Hardie shares.[71] On 5 January 2000, the Australian Financial Review reported that ‘as the international number crunchers run the rulers over Hardies, they are likely to find some poison pills primarily relating to asbestos liabilities’.[72]
On 16 February 2001, James Hardie announced the creation of the Medical Research and Compensation Foundation. The CEO of James Hardie, Mr Peter Macdonald, stated that ‘the establishment of the ... foundation provides certainty for people with a legitimate claim against the former James Hardie companies which manufactured asbestos products. Its establishment has effectively resolved James Hardie’s asbestos liability and this will allow management to focus on growing the company for the benefit of all shareholders.’[73] ‘... James Hardie is satisfied that the foundation has sufficient funds to meet anticipated future claims’ he said.[74] Mr McDonald also stated that the $293 million was not derived from operating assets but represented primarily the net assets of two subsidiaries commonly named in asbestos lawsuits, AMACA Pty Ltd and AMABA Pty Ltd.[75]
James Hardie is confident that the creation of the trust has eliminated its potential liability for asbestos. Accordingly, no provision was made in its 2001 and 2002 annual reports, revealed by the notes accompanying the financial statements.
With the establishment and funding of the Medical Research and Compensation Foundation... the Company no longer owns or controls two Australian companies which manufactured and marketed asbestos-related products prior to 1987.... As these two former subsidiaries are no longer a part of James Hardie, and all such claims have been successfully defended by JHIL, no provision has been established in the Company’s accounts at March 31, 2001 or 2002.[76]
(ii) CSR Limited
CSR is another major defendant in Australia that was involved in asbestos mining and the sale of asbestos-containing products. Most importantly, it conducted the Wittenoom mine in Western Australia through its subsidiary, Australian Blue Asbestos Ltd (ABA).[77] CSR held all the shares[78] and on 23 June 1943 ABA appointed CSR ‘to Act as its Managing Agent and Sole Distributor with full and absolute authority to do all things necessary for the proper management and control of the business and undertaking of [ABA]’.[79]
Wittenoom has particular importance because the liability of CSR is potentially extensive and likely to move in waves as new classes of plaintiffs establish liability. For example, the liability of CSR for injuries suffered to the townspeople of Wittenoom was established in 1998 by the New South Wales Court of Appeal in CSR v Young.[80] The Court of Appeal found that CSR owed a duty of care to the people living in the town which was coextensive with that owed by ABA. The court documented the knowledge possessed by CSR of the dangers of asbestos prior to and during the mining operations[81] and found that it had caused the injuries suffered by the plaintiff.
The finding is significant because crocidolite tailings from the tailings dump of the mine were spread around the town as a cheap gravel and sand substitute, particularly around buildings and public housing. As stated by Snell:
The tailings were used ... in public works on local roads around the town, at the golf course, racecourse, airport, drive in cinema and caravan park. Tailings were also used for concrete slabs and pads for houses. Residents spread tailings around domestic driveways, gardens and yards. Domestic activities like mowing the lawn, children playing on the ground or pets digging stirred up the dust. The airport was very hazardous because of the dust from aircraft taking off and landing.[82]
Although the mine was closed in 1966, Wittenoom’s contamination with crocidolite appears to be unique. The extensive use of large quantities of milled crocidolite as land fill and in construction has not occurred anywhere else in the world.[83]
Another facet of CSR’s liability concerns injuries suffered by US citizens in handling asbestos mined at Wittenoom. Prior to 1990, employees of Johns-Manville commenced the vast majority of the asbestos claims against CSR. Manville was the principal purchaser of the asbestos sold by CSR. Subsequent claims were for injuries caused by the finished products of Manville where the plaintiff alleged that CSR asbestos had been used during manufacture. CSR believes that both the claims in both categories — worker and finished product — are attributable to Manville’s bankruptcy. [84]
Despite a potentially burgeoning liability, on 21 May 2001 CSR announced that it did not wish (at this stage) to adopt the same model as James Hardie to deal with the problem: ‘We obviously watch the situation carefully,’ Mr Brennan said. ‘We don’t see the James Hardie solution, in inverted commas, as something we want to pursue. ‘We might do something similar at some stage but certainly not now.’[85]
CSR’s annual report for 2001 included a $65 million increase in its product liability provision which covers asbestos claims. The company stated:
[M]anagement is of the opinion that asbestos litigation in the United States and Australia will not have a material adverse impact on CSR Group’s financial condition. However, an adverse outcome in a single case may negatively affect CSR Group’s earnings in a particular reporting period and there can be no assurance that the litigation will not have a material adverse impact on the CSR Group’s financial condition.[86]
Accordingly, CSR has entered into a number of global settlements of the Manville worker claims with various claimants’ counsel.[87]
When faced with the need to reorganise, defendants in Australia would generally choose either a voluntary administration under Part 5.3A or a scheme of arrangement under Part 5.1 Corporations Act 2001 (Cth). Voluntary administration is generally the procedure of choice as it does not involve the leave of the court and is therefore less costly. The effect of the provisions is to impose a short ‘breathing space’ within which an insolvency practitioner (the administrator) may examine the company’s position and make an informed recommendation to the company’s creditors.[88] Over the last few years the procedure has been used for large complex insolvencies, exemplified by Ansett Australia Ltd.
The other question about the voluntary administration procedure in this context is whether companies must be insolvent to use it. If so, the procedure would be distinguishable from Chapter 11 of the US Bankruptcy Code. Under Corporations Act ss436A–436B, an administrator is generally appointed by a resolution of the board that, in the opinion of the directors voting for the resolution, the company is insolvent or is likely to become insolvent at some future time and an administrator should be appointed. According to Crutchfield, the administration procedure is open to companies which are not insolvent at the time when the resolution is passed, provided that the directors are satisfied that there is a likelihood that the company will become insolvent at some future time.[89] However, Keay has stated that it could be argued that many companies might become insolvent in the future and it may be preferable to provide a definite requirement or else merely state that insolvency in the future is likely.[90]
Australian judges could adopt the American approach and interpret the ‘future time’ requirement flexibly to facilitate reorganisation without proof of insolvency or they might require insolvency as a precondition to the use of the procedure. The latter approach has been taken in the United Kingdom.[91] In the UK an administration order may be made under Insolvency Act 1986 (UK) s8 if the elements of s123 of the same act are satisfied. Pursuant to the tests in s123, the company must be unable to pay its debts as they fall due. Either a ‘cash flow’ test or a ‘balance sheet’ test achieves proof of insolvency. A cash flow test, which is concerned with the existing situation, will be of limited utility because it will only be concerned with debts which presently fall due. However, on the ‘balance sheet’ test the company will be deemed to be insolvent if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities. Brown suggests that contingent and prospective liabilities must be taken into account, though it is not clear whether s123 requires that a value be attached to them.[92] Section 8(1) of the Insolvency Act 1986 (UK) also allows an administration order to be made where the ‘company is likely to become unable to pay its debts’. This provision gives rise to the time frame problems discussed above. The predictive element in s8 in combination with the uncertainties surrounding the valuation of contingent and prospective liabilities suggests that the exercise ‘cannot be approached too scientifically’.[93]
However, both Australian and UK insolvency regimes have supplanted procedures that require the leave of the court. The practicalities of insolvency management have favoured the evolution of cheap, expeditious procedures that may be activated by companies and creditors. An undesirable consequence of this development is the removal of the judicial gatekeeping role.[94] Under previous regimes judges could scrutinise the proposed reorganisation to check if it is desirable in all the circumstances. The current regime in Australia does not contemplate any routine monitoring by the courts. The UK system now requires that certain documents be filed in court, for example, a statutory declaration evidencing insolvency[95] and administrators’ reports,[96] but it is difficult to ascertain whether the courts will actively monitor insolvent administrations or merely act as information registries. Although both the Australian and UK regimes provide opportunities for creditors to challenge the administrations in court,[97] the difficulties of ensuring effective representation of present and future claimants abound. This will be discussed in further detail below.
The basic scenario for class actions in Australia has been that opt-in procedures occur in the Supreme Courts and the Federal Court has opt-out procedures under Part IVA of the Federal Court Act 1976 (Cth). Additionally, opt-out procedures are available in South Australia and in the Victorian Supreme Court. Australia has had a few mass torts based on product liability[98] and major accidents such as the explosion at the Longford gas plant in 1998 which deprived Melbourne of gas for several days.[99] However the asbestos litigation in Australia has been overwhelmingly conducted on an individual basis. This is probably because, firstly, the quantum of damages that may be awarded to an individual litigant in an asbestos claim is often significant and therefore class action procedures are not justified on a cost-benefit basis.[100] Secondly, a significant portion of the asbestos work is conducted in New South Wales and Western Australia, which do not have opt out procedures.
There is a limited fund rule in Part IVA of the Federal Court Act and the Supreme Court Act 1986 (Vic)[101] which are both modelled on Rule 23 (b)(1)(B) US FRCP. There have been settlements of group proceedings effected upon a limited fund model, for example in Lopez v Star World Enterprises Pty Ltd.[102] However in that case the defendant was in liquidation by the time that settlement was achieved and the Court ordered that members of the class could opt out of the settlement.[103] Similarly, the judgment of Goldberg J in Williams v FAI Home Security Pty Ltd (No. 4)[104] shows considerable caution in dealing with the res judicata effects of potential settlement between the plaintiff and defendant firms. To my knowledge, global mandatory settlements along the lines attempted in Amchem and Ortiz have not been attempted in Australia, but there is considerable potential for defendants to do so.
High Court decisions on class actions indicate that the High Court is willing to facilitate the use of class actions,[105] although the thorny issues about individual rights in the class action context are yet to be considered. Constitutional issues, such as the individual right to notice[106] and right to have damages assessed individually,[107] have been considered by the Full Court of the Federal Court and the Victorian Court of Appeal respectively. Both jurisdictions have taken a cautious but pragmatic approach. However, in the view of the writer, a genuine controversy about due process entitlements in class actions has not yet surfaced at the appellate court level in Australia.
On 1 October 2001 Federal-Mogul Corporation announced that the company had voluntarily filed for financial restructuring under Chapter 11 of the US Bankruptcy Code in order ‘to separate its asbestos liabilities from its true operating potential’. In addition, Federal-Mogul subsidiaries in the United Kingdom had filed jointly for Chapter 11 and administration under the Insolvency Act 1986 (UK).[108] The Press Release assured readers that it was business as usual and opened with the following list:
A Press Release issued less than two weeks later boasted that Federal-Mogul had won four contracts valued at more than $20 million annually.[109]
One of the subsidiaries seeking an administration order was T&N Ltd,[110] one of the largest asbestos defendants in the UK.[111] Further, like the other asbestos defendants discussed above, the history of T&N demonstrates the usual pattern of first-hand knowledge of the risks of asbestos exposure accompanied by concealment of the risks for commercial ends.[112]
By 1994, the cost to T&N of asbestos litigation was spiralling. In that year, the company announced a net loss of £16.5 million due to an increase in asbestos-related costs.[113] In 1996, the share price was 138p and the market value of the company was depressed by the huge cost of settling asbestos liabilities.[114] The company responded by taking out an insurance policy which effectively ‘collared’ the asbestos liability at about £1.2 billion, of which T&N contributed £300 million.[115]
By October 1997 the share price of T&N had risen to around 240p on the basis of takeover speculation.[116] A formal bid was made by Federal-Mogul on 16 October 1997 at the price of 263p per share.[117] Although the City had been worried about the drain on T&N’s cashflow from asbestos litigation, the Chairman of T&N argued that ‘the City got it wrong and [Federal-Mogul] got it right.’[118] The Times commented that ‘the City had allowed its paranoia about asbestosis liabilities to obscure the true value’ of T&N.[119]
However, by October 2001, the value of Federal-Mogul had slumped from US$5 billion to a low of $50 million.[120] The Times had changed its tune somewhat and with the wisdom of hindsight stated:
[t]he curse [of asbestos] seems, however, to have beaten all calculations. The London stock market never really rated Turner & Newall as it might a company without a fatal flaw. Federal-Mogul did. The US motor components group never made asbestos products but bought into asbestosis by taking over T&N and others. Now it too is seeking protection from its asbestosis creditors as well as challenging their claims in court.[121]
The administration order had the effect of freezing present and future asbestosis claims. A lawyer acting for plaintiffs said that several of the company’s settlement cheques had bounced and they could not now say when, if ever, the money due would be paid since there was some doubt about the company’s insurance coverage.[122] In an Early Day Motion lodged in the House of Commons on 14 November, 41 MPs deplored ‘the fact that the company can remain trading and protect the interest of its shareholders but can abnegate its responsibilities towards its former employees who are now suffering from chronic and terminal asbestos-related disease[s]’.[123]
[The court] feared on the one hand that an early reorganization might be misused by a firm to escape its tort liability. Yet it feared on the other hand that a failure to reorganize early could cripple the firm and leave later tort victims with empty claims against a corporate charter.[124]
The asbestos litigation established that many defendant manufacturers in the US, Australia and the UK knew at an early stage about the dangers of asbestos and made a commercial decision to keep producing it, thereby jeopardising lives. The tort system has a role to play to deliver corrective justice by providing compensation to those who were injured by their acts. However, whilst an individual tort victim could collect his or her golden egg, the escalation of the number and size of claims threatened to ‘kill off’ defendant enterprises. The defendants’ response was to use insolvency and class action procedures to aggregate present and future claims and to isolate those claims from the main enterprise through a limited fund. This led to undercompensation of the tort victims, whereas the enterprise remained viable or even thrived.
In the following discussion the dilemmas raised by this scenario will be explored. It is clear that the right of the tort victim to receive compensation is relational to the entitlement of the corporation to collectivise claims and provide less compensation. But when should the corporate entitlement be exercised? I will argue that it should only be exercised upon proof of genuine insolvency, in order to protect the norms underpinning insolvency law, for example, debtor autonomy and fresh start. This precludes the class action alternative. As the US Supreme Court made clear in Ortiz, a corporation cannot act unilaterally to create a limited fund. Thus the need for caution in relation to the arrangements made by James Hardie. As stated above, the power to collectivise must be based on a genuine insolvency. If we respond honourably to the golden egg argument and decide that present sacrifices should be made for future claimants, we must ensure an equitable distribution between present claimants, future claimants and corporate stakeholders. In particular, we must be wary of strategic behaviour and wealth transfers, as discussed below.
A citizen’s obligation to compensate an injured person when the citizen has committed a tort is clear. Honoré argues that the tort system is one means by which the state, on behalf of the community, seeks to reduce conduct that it sees as undesirable. If the state is justified in making certain types of conduct criminal and attaching to it penalties that may include prison, it must also be justified in marking conduct as tortious and attaching to it the lesser sanction of compensation.[125] Legal sanctions respond to legal liability and more importantly, to historic responsibility.[126] Arguably, the tort system must deliver corrective justice in the asbestos context. ‘Corrective justice’ refers to a system of rights and obligations of repair.[127] Here asbestos defendants concealed the dangers of asbestos and thereby injured successive generations of workers and others. Corrective justice requires those who have without justification harmed others by their conduct ‘to put matters right’.[128]
However, the obligation of defendants to put matters right operates within a complex web of practices about taking responsibility and holding persons responsible, as well as relationships which flow from these practices.[129] By way of example, the obligation of the tortfeasor to put matters right is not infinite and it is well accepted that the solvency of the tortfeasor marks the outer limits of this obligation in practical terms. This is an important aspect of litigation practice — the search for the ‘deep pocket’ defendant or for a pool of funds provided by an insurance policy. The capacity to seek the benefits of insolvency is an important right of the tortfeasor which protects his or her autonomy.[130]
In this part of the article I will primarily focus upon the principles of insolvency. However, defendant class actions and insolvency procedures are often functionally equivalent because under both procedures the debtor/defendant is granted the power to:
1. collectivise the claims of the tort creditors (generally through a limited fund); and
2. discharge the responsibility to pay compensation because of the operation of the ‘fresh start’ principle under bankruptcy law and res judicata under class action law.
The first power listed above gives rise to two independent effects that occur in long tail mass torts:
a) The collectivisation will almost inevitably lead to under-compensation of tort creditors. Not only does this lead to inequity,[131] it also results in a shift to other tortfeasors[132] who may have less culpability. In the class action context it leads to complex questions about maintaining the collectivisation when an individual asserts his or her right to opt out of the proceedings.
b) Over the long term operation of the collectivisation, the class will have a fluctuating population and further members of the class will make claims. Very important questions arise about how we can protect those future interests.
Although functionally equivalent, the procedures are morally distinct. Although both are based on a limited fund model, defendant class actions (and the James Hardie foundation) are voluntary and unilateral. Insolvency procedures are beneficial and designed to overcome involuntary adversity. Ultimately a person must earn the power to collectivise and a power to mandate a collectivisation must be carefully scrutinised. This anticipates increased monitoring by the judiciary. These issues will be discussed in more detail below.
Bankruptcy law prevents a costly and destructive race to the firm’s assets by offering a collective proceeding that freezes the rights of all investors in the firm, values them, then distributes them according to a priority scheme that the parties agreed would be used in [this] event... [133]
Insolvency law at its core is concerned with collective action and is designed to keep individual actions against the insolvent debtor from interfering with the best use of assets for stakeholders as a group.[134] Economic analysts[135] argue that an ‘agreement’ arises which mirrors the bargain that creditors would have made amongst themselves if they were able to negotiate before the onset of insolvency.[136] However, its power to explain the allocation of entitlements of involuntary creditors is debatable, as will be discussed below.
The need for the collectivisation arises because there is a limited pool of assets to which each of the claimants has an equal title. Since the titles are equal, no one of the creditors should be able to use his superior strength or swiftness to get more of the common pool than his just share. Thus a moratorium is placed on claims.[137] Kilpi describes the ethical underpinning of the collectivisation in the following way:
[I]nterference in individual debt collection is justified because the target of individual seizure efforts is actually a common pool to which no sole person should have an exclusive right. Ethically it is recognition that the debtor’s insolvency has extinguished her moral right to her property and the joint right of the creditors has taken over. The institution of bankruptcy, by transferring the property to the creditors’ joint control, gives legal expression to this ethical idea.[138]
Keay argues that the collectivisation allows the general group of unsecured creditors to be the primary beneficiaries of the bankruptcy, but the collectivisation must be accompanied by the equal treatment of creditors who are similarly situated.[139] Therefore, in a reorganisation, all general unsecured creditors should share available proceeds pro rata. Future claimants and other tort creditors should be treated on par with other unsecured creditors.[140]
Kilpi adopts a Kantian perspective by arguing that insolvency law is an important protection of autonomy. Although it is important that we keep our promises or fulfil our legal responsibilities, the protection of autonomy allows us to break our promises or fail to repay our debts without becoming a slave to the promisee or going to debtors’ prison. Moreover, the concept of autonomy protects us from the full consequences of error, or as Kilpi puts it, ‘going broke, breaking promises’.[141]
Bankruptcy must allow a person who is in a hopeless financial position to obtain relief from the pressure of creditors and to be given an opportunity to make a fresh start. In the past, the emphasis of bankruptcy laws was to deter default and to punish defaulters. The policy underlying bankruptcy is now rehabilitation rather than retribution.[142]
Modern insolvency law does not decree that every last cent of the debtor must be spent on paying back debts. There is no rule of law or of morality that requires the tortfeasor to exhaust all of her resources for the sake of compensating tort creditors. This principle applies with particular force when the tortfeasor is undergoing reorganisation because a primary goal of reorganisation is amelioration of ‘the devastating effect that a huge liability may have on the worth of a business’.[143] As stated by Resnick, ‘the protection of the business enterprise by preserving its going concern value, thereby maximizing value for distribution to creditors, is central to the reorganization process.’[144]
The Manville reorganisation exemplifies the unfairness of persons in the present taking for themselves resources that ought to be reserved for the future. Many of the controversies of our time — the use of natural resources and the preservation of the environment, the status of social security ... for example — involve the potential misappropriation of resources rightfully belonging to future persons.[145]
Protecting the defendant from unrestrained litigation requires the altruism called for by Smith (above) — that we should not misappropriate resources rightfully belonging to future persons.[146] The ultimate problem about submitting individual action to collective interests in this context is one of incentive. Although individual plaintiffs may be prepared to take up Smith’s challenge to subvert their own interests to preserve resources for future claimants, there are significant disincentives created by the self-interested behaviour of corporate participants. This is exemplified by strategic bankruptcy and wealth transfers to shareholders which will be discussed later.
A further question arises which is both practical and normative. Can we truly look after the interests of future claimants in this system? In relation to the normative questions, it could be argued that the Supreme Court has foreshadowed its approach by imposing the due process requirements in Amchem and Ortiz.[147] Going beyond the actual decisions in Amchem and Ortiz, Gibson suggests that there are wider due process and fairness concerns which animate the Court’s reasoning.[148] She concludes:
My enthusiasm for a bankruptcy solution ... is tempered by the recognition of the concerns expressed by the Supreme Court in other mass tort contexts about forcing a judicial resolution on claimants who are not active participants in the lawsuit leading to the global solution.[149]
The concerns of the Supreme Court in Amchem were elegantly expressed. Their Honours raised questions about the efficacy of notice to persons who ‘may not even know of their exposure, or realize the extent of the harm they may incur’ and wondered whether ‘notice sufficient under the Constitution ... could ever be given to legions so unselfconscious and amorphous’.[150]
Roe focuses on the inability of future claimants to effectively negotiate and raises the considerable problem of undercompensation. He states that:
... the norm of accurate compensation is much more significant in tort reorganizations than in financial reorganizations; indeed, it may be central. In financial reorganizations, the actors — banks, insurance companies, the public shareholders — can bear the risk of a disparate outcome. They have either assumed that risk of miscompensation or can be viewed as having assumed it, and they often can diversify their holdings to offset its impact. None of this can be said about the individual tort claimant. He is far less able to bear such a risk. He cannot easily avoid the risk by marketing his claim, did not assume the risk, and usually cannot diversify.[151]
There is of course a myriad of practical problems which beset attempts by the courts to assess future claims. Occasionally the courts have appointed an officer to represent future claimants but there are still process hazards in this plan.[152] Furthermore, the concept of a ‘future claim’ has been poorly developed in US law[153] and there is a natural reticence to delve too far into future uncertainties as well as grappling with present ones. Judicial estimation of mass tort liability has not been an unqualified success,[154] as evidenced by the enormously inaccurate estimate made by Lifland J of the needs of future claimants in the Manville reorganisation.[155] As stated above, an amount that was intended to last the lifetime of the trust was exhausted in 18 months.
Jackson suggests that whenever bankruptcy law changes the relative value of ‘nonbankruptcy rights’, incentives are created for inappropriate uses of the bankruptcy process.[156] Strategic insolvency arises where the bankruptcy is invoked due to strategic decision-making rather than being a passive response to market forces. Delaney argues that a strategic bankruptcy arises when a firm mobilises the bankruptcy process in order to transform ties with other institutions or groups of individuals.[157]
Clearly there are enormous incentives for the asbestos defendants to use reorganisation to evade paying compensation to tort victims. As discussed above, Smith considered that the most controversial aspect of the Manville bankruptcy was the premise that the corporation was entitled to bankruptcy protection not because it was insolvent, but because a bankruptcy reorganisation the best way to manage the payment of present and future claims.[158]
Smith continued:
Despite its novelty, the premise of the Manville bankruptcy petition made sense as policy. It was difficult to see how the problem of looming future liability could be fairly solved outside of bankruptcy, whatever was the technical legal status of this future liability. ... From the outset, fair treatment of future claimants was a major justification for the Manville bankruptcy.[159]
With respect, the logic of these statements is hard to follow. The arguments demonstrate the danger of allowing the power to collectivise to deviate too far from its normative underpinning. The norms underpinning bankruptcy are discussed above — to protect the autonomy of the debtor, to apply the pari passu principle and to rehabilitate in the case of reorganisations. The power must only be triggered by insolvency because otherwise a coercive collectivisation is unjustifiable. The point is made elegantly by her Honour Edith Jones, a former US Bankruptcy judge and currently Judge of the US Court of Appeals for the Fifth Circuit:
The question again arises whether the mass future claims proposals have anything to do with bankruptcy, or whether they are a contrivance to shoehorn mass tort litigation into a coercive, collective settlement that preserves management control and shareholder equity.[160]
As regards bankruptcy, the minimum safeguard must be the need to prove insolvency. In this respect, the UK system is superior to the Australian and US systems because it requires proof of insolvency before the power to collectivise can be exercised. But in addition, judges should act as affirmative gatekeepers of the power to collectivise. In a comparison between US and Japanese insolvency laws, Anderson has stated that ‘Chapter 11 debtors tromp without hesitation through automatic doors into the waiting protections of reorganization, while Japan’s debtors must pass a doorman’s inspection before they are allowed in’.[161] Removal of the need to prove insolvency under Chapter 11 of the Bankruptcy Code (US) should not be emulated in other jurisdictions and the power to collectivise should be carefully monitored.
The alternative to threshold judicial scrutiny is monitoring by creditors. In Australia, as stated above, a voluntary administration may be challenged on several grounds — inter alia because the company is solvent or because the provisions of Part 5.3A are being abused.[162] The potential of voluntary administration procedures to facilitate strategic behaviour has been recently recognised in Australia, most notably in the MUA v Patrick Stevedores litigation.[163] In the US, Chapter 11 of the Bankruptcy Code (US) provides similar mechanisms to challenge the reorganisation on good faith grounds,[164] but effective representation of tort creditors is almost impossible to achieve.[165]
Perhaps these problems may be resolved by conferring preferred priority status upon these claims.[166] However, the preferred priority rules which currently apply in Australia, the UK and the US at best only apply to injury compensation arising out of an employment relationship; there is no priority for general personal injury tort creditors such as the townspeople of Wittenoom.[167]
In each of the case studies discussed above, a jump in the share price accompanied a reorganisation or the announcement of a class action certification. Coffee argued that the 300 per cent increase in Fibreboard’s share price upon certification of the mandatory class action amounted to a wealth transfer.[168] Similarly, the share price of T&N doubled during 1996–1997 and it could be argued that a wealth transfer arose by Federal-Mogul’s speculation upon T&N’s asbestos liabilities. The shareholders clearly profited from the transaction, but the asbestos claims are now in jeopardy.
Although shareholders entitlements should be subordinated to creditors upon a winding up or a reorganisation,[169] a study by LoPucki and Whitford found that shareholders of insolvent companies nearly always shared in the distribution under the reorganisation plans of large, publicly held companies.[170] They also found that the relative size of shareholders’ recovery was more attributable to the quality and aggressiveness of equity’s representation than the financial condition of the company.[171]
Given the difficulties with representing the interests of future claimants, the wealth transfer seems insuperable. However, the Australian courts have buttressed the procedural rights of claimants over the last decade. There have been developments in two areas which might be of interest. Firstly, the High Court held in 1994 that a plaintiff’s claim for damages due to negligence causing personal injuries was ‘property’ for the purposes of s51(xxxi) of the Constitution and thus only able to be acquired by the Commonwealth on just terms.[172] The second development involves expansion of Mareva orders. A Mareva order is an interlocutory order which restrains the defendant from removing assets or disposing of assets with such effect that if the plaintiff should obtain judgment against the defendant there will be insufficient assets from which the plaintiff can obtain satisfaction of his judgment.[173] The effect of a Mareva order is to preserve the defendant’s assets (or so much of them as would be necessary to satisfy the plaintiff’s claim) so they will be available to satisfy the plaintiff’s judgment if she obtains it. The Mareva order does not give the plaintiff any lien or other proprietary interest in the assets so preserved. In Cardile v LED Builders P/L[174] the majority of the High Court stated that the purpose of the Mareva order is to avoid frustration of the court’s process.[175] Whilst neither development would currently allow future claimants to restrain a wealth transfer, they might be a source of further doctrinal development.
Asbestos litigation has provided our community with complex legal questions, but more importantly, invidious moral choices. The history of asbestos reveals that many corporations cynically disregarded the health and ultimately the lives of others by making commercial decisions to mine and manufacture asbestos decades after its dangers were publicly recognised. Due to the long latency of diseases like asbestosis and mesothelioma and the early difficulties in establishing liability, the defendants only became answerable under tort law in the 1970s. However, by that time the number of injured had spiralled, so that by 1982 the largest asbestos manufacturer in the USA, Johns-Manville, decided it needed to protect itself against the escalation in claims.
A twist in the morality story then occurred because Manville argued that it needed to survive in order to pay future asbestos claims and it was critical not to kill off the goose that laid the golden egg. Due to a quirk of US insolvency law, Manville was permitted to reorganise under Chapter 11 of the US Bankruptcy Code, even though it was not insolvent.
Fundamental to the Manville reorganisation was the power to collectivise the asbestos claims, forcing plaintiffs to divert their claims from the corporation itself to a fund set aside for that purpose. This fund proved to be inadequate and after 20 years the sum available to claimants is 5 per cent of their entitlements. Most importantly, the goal of forcing the claimants to collectivise and to satisfy their claim out of a limited fund had been achieved without proof of insolvency.
In the late 1990s, asbestos defendants sought wider powers to collectivise their claims through class actions. They argued that a limited fund should be allocated which should be distributed to asbestos claimants across the US. The class would include future claimants and a moratorium upon claims against the companies would be achieved by operation of the doctrine of res judicata. Although there was no suggestion of insolvency, Manville had already established that insolvency was not critical to the inquiry, rather, it was a question of ‘enterprise threatening liability’.
The attempt to use the class action to coercively collectivise without insolvency was unsuccessful. The Supreme Court in the Amchem and Ortiz cases denied limited fund status purely for a sum that had been set aside by the defendant. The Supreme Court also raised doubts about whether the procedural rights of future claimants could realistically be protected under the proposals.
Recently, the largest asbestos manufacturers in Australia and the United Kingdom rearranged their assets to limit their asbestos liabilities. In the case of T&N, the company was subject to an administration order which flowed from a Chapter 11 reorganisation of its parent company. The effect of the order was draconian — the settlement cheques of tort victims immediately bounced.[176]
Mass torts in general throw up formidable problems; attempts to solve the problems have consumed a vast amount of law journal space in the last few years. Some commentators suggest that wide-ranging institutional redesign involving the tort, litigation and insolvency systems might be necessary. For example, Abraham argues that the liability rules in tort need to be remodelled to recognise collective responsibility.[177] Clearly, there is a danger in attempting to force the mass tort problem into traditional frameworks, but this danger is accompanied in the present debate by a lag in the theoretical development of the law in this area compared with its empirical development.[178]
In the meantime, in the view of the author, the right to coercively collectivise and to make a fresh start is only morally defensible in situations of genuine insolvency in order to protect the autonomy of the debtor. The power to collectivise and to create a limited fund for tort claims is far reaching and must be carefully monitored by the courts. The case studies reveal that the creation of a limited fund generally results in the under-compensation of tort victims, particularly future claimants. This may be acceptable upon a genuine insolvency, but not by unilateral acts of the corporate defendant. The situation becomes particularly inequitable when wealth is transferred from claimants to shareholders.
Overall, it is a considerable challenge. Commenting on the T&N administration, John Battle, MP for Leeds, reminds us:
This evasion is a scandal. Making the polluters pay obviously means not only proving responsibility, not only winning the moral and legal arguments, but taking on high level international corporate gamesmanship that continues to write off the lives of asbestos victims.[179]
[*] Reader in Law, Faculty of Law, ANU. The author wishes to thank Kent Anderson, Juliet Behrens, Stephen Bottomley, the two anonymous referees and the participants in the CLTA Conference at Monash University on 12 February 2002 for their helpful and insightful comments on this article and the issues raised by it.
[1] Anthony Hughes, ‘Hardie Cleans Up Its Asbestos Act’ Sydney Morning Herald (17 February 2001) at 51.
[2] Ben Hills & Anthony Hughes, ‘Asbestos Money “Not Enough” ’ Sydney Morning Herald (17 February 2001) at 3.
[3] ‘Mass torts’ may be defined as ‘encompassing any (negligently or strictly) tortious systematic risk-taking by business that exposes some population of individuals to injury in person or property or both. All product and occupational liability, as well as all business-generated environmental hazards, are mass torts.’ David Rosenberg, ‘Mass Tort Class Actions: What Defendants Have and Plaintiffs Don’t’(2000) 37 Harv on Legis 393 at 393.
[4] A problem of terminology is already arising because we need to think about two different concepts — bankruptcy and insolvency. In this article I will use the word ‘bankruptcy’ in a general sense to describe the capacity to invoke the legal machinery of insolvency such as reorganisation procedures and in a particular sense to refer to US procedures. The distinction between bankruptcy and insolvency is important, but the terminology is slippery. ‘Insolvency’ is defined under s95A of the Corporations Act 2001 (Cth) as the inability to pay debts as and when they fall due. In Australia and the United Kingdom, the term ‘bankruptcy’ generally refers to the end point of a process undertaken under the Bankruptcy Act and specifically refers to individuals. In the USA, the term refers to both corporate and individual bankruptcies under Chapter 7 of the Bankruptcy Code and reorganisations under Chapter 11 of the same code. By comparison, in Australia ‘corporate insolvency’ is dealt with under Chapter 5 of the Corporations Act 2001 (Cth).
[5] In a long-tail tort there is a long latency period between a person’s use or exposure to a harmful product and the first manifestation of harm.
[6] Such as Agent Orange, Dalkon Shield and silicone gel breast implants.
[7] Asbestos will have the greatest number of claims and liability will come in waves for many years to come. For example, in CSR v Young (1998) Aust Torts Reports 81–468 at 64952, the New South Wales Court of Appeal found CSR liable in the first mesothelioma case involving the townspeople of Wittenoom. The plaintiff was not an employee of CSR or its subsidiaries.
[8] The judgment in Borel v Fibreboard Paper Prods Corp [1973] USCA5 840; 493 F 2d 1076 (1973) by the US Fifth Circuit that asbestos manufacturers could be held strictly liable for injuries resulting from asbestos exposure is regarded as the point at which asbestos litigation began in the USA.
[9] In 2001 Behrens and Parham quote statements by two asbestos defendants (GAF and Owens Corning) who had settled more than 740 000 claims. See Monica Parham & Mark Behrens, ‘Stewardship For The Sick: Preserving Assets For Asbestos Victims Through Inactive Docket Programs’ (2001) 33 Texas Tech Law Review 1 at 1–2. A study by the RAND Institute in August 2001 showed that although more than 500 000 claims have been filed, this may be less than half of those that ultimately come forward: Deborah Hensler, Stephen Carroll, Michelle White & Jennifer Gross, Asbestos Litigation in the US: A New Look at an Old Issue (RAND Institute, 2001).
[10] For example, Federal Court Act 1976 (Cth) s33ZA; Federal Rules of Civil Procedure (US), Rule 23(b)(1)(B).
[11] James Hardie Australia Pty Ltd, ‘James Hardie Resolves its Asbestos Liability Favourably for Claimants and Shareholders’, Press Release, 16 February 2001: <http://www.ir.jameshardie.com.au/JH_ir/news/jhilasbestosrelease.htm> (12 January 2003).
[12] Aesop tells the story of the Goose with the Golden Eggs. In that story a farmer was astonished to discover that his goose had laid an egg of solid gold. He took the golden egg to the market and sold it for a good price. Every day thereafter the farmer found an egg of the purest gold and he sold them one by one. He became a rich man. One day he thought, ‘Why must I be content with only one golden egg a day? If I kill the goose and cut her open, I can take all the treasure at once!’ Whereupon he killed the goose but there was no gold at all inside. ‘Foolish man!’ cried his wife, ‘if only you had understood that those who are greedy for too much sometimes lose all.’ Ann McGovern, Aesop’s Fables (9th ed, 1974) at 72.
[13] The company boasted in an article in Asbestos Magazine in 1970 that ‘Johns-Manville participates in almost every facet of the Asbestos Industry and is the largest producer of asbestos-based products in the United States.’ Asbestos Magazine (Sep 1970) at 14–15 quoted by Weinstein J in In Re Joint Eastern & Southern Dist. Asbestos Litig. 129 B R 710 (1991) (hereinafter In Re Joint Eastern & Southern), 742.
[14] Concerns about asbestos have some antiquity. In 1st Century AD, Pliny the Elder noted that slaves working in asbestos mines were dying at a young age of lung disease. By the 20th century the concerns were gaining momentum. For example, in 1926 the first of hundreds of successful claims for compensation for asbestos disease were settled by the Massachusetts Industrial Accidents Board and in 1930 the British Home Office reported widespread asbestos disease in UK factories and introduced regulations controlling dust particle density. For a history, see Paul Brodeur, Outrageous Misconduct: The Asbestos Industry on Trial (1985).
[15] Brodeur, id at 113–114.
[16] Barnett v Owens-Corning Fiberglas Corp et al (Ct Common Pleas, 23 August 1978).
[17] Francis McGovern, ‘Resolving Mature Mass Tort Litigation’ (1989) 69 Boston University Law Review 659. Between 1984 and 1990, the asbestos cases pending in the US District Courts increased from 7923 to 33 182 (Judicial Admin Office, Civil Cases (Asbestos Only) Commenced, Terminated and Pending During Twelve-Month Period Ending Dec. 31, 1990 Table C 1 (1991) quoted by Weinstein J in In Re Joint Eastern & Southern, above n13 at 745). In 1991 it was predicted that as many as 265 000 deaths due to asbestos would have occurred before the year 2015 (Report of the Judicial Conference Ad Hoc Committee on Asbestos Litigation 2 (Federal Judicial Center 1991), quoted by Weinstein J in In Re Joint Eastern & Southern, above n13 at 746).
[18] Kevin Delaney, Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage (1992) at 61. Coffee reports that in 1982 over 16 500 cases were outstanding against the company. Manville had either settled or judgment had been entered in more than 3570 claims at an average disposition cost of $20 000. John Coffee, ‘Class Wars: The Dilemma of the Mass Tort Class Action’ (1995) 95 Columbia Law Review 1343 at 1387.
[19] Coffee, ibid.
[20] Frank R Kennedy, ‘Creative Bankruptcy? Use and Abuse of the Bankruptcy Law — Reflection on Some Recent Cases’ (1985) 71 Iowa Law Review 199 at 202. One author has stated that the reorganisation made front page news throughout the US because at the time Manville was the largest company ever to file under this legislation, and, with assets of more than $2 billion, one of the richest companies ever to take such action. At the time it was 181st on Fortune’s list of the US top 500 industrial corporations. London Hazards Centre, Asbestos: The Worst Industrial Killer (1994): <http://www.lhc.org.uk/members/pubs/books/asbestos/asb09.htm#_Toc401990477> (12 Jan 2003).
[21] Delaney, above n18 at 62.
[22] Kennedy, above n20 at 202.
[23] Greg Zipes, ‘After Amchem and Ahearn: The Rise of Bankruptcy Over the Class Action Option for Resolving Mass Torts on a Nationwide Basis, and the Fall of Finality?’ (1998) Detroit College of Law at Michigan State University Law Review 7 at 50.
[24] Thomas Smith, ‘A Capital Markets Approach to Mass Tort Bankruptcy’ (1994) 104 Yale LJ 367 at 373.
[25] In Re Joint Eastern & Southern, above n13 at 752 (Weinstein J).
[26] Manville’s shareholders lost up to 80 per cent of the value of their stock in a ‘reverse split’ in which six shares were traded for a single share. Delaney, above n18 at 72.
[27] It is a fundamental premise of corporate law that shareholders’ interests are deferred to creditors. Upon winding up, shareholders should receive nothing until creditors are paid in full. In US bankruptcy law the principle is referred to as the ‘absolute priority rule’. As applied to a reorganisation it means that when a firm owes more than its assets are worth, the shareholders receive nothing unless the creditors consent. See Douglas Baird & Thomas Jackson, ‘Bargaining after the Fall and the Contours of the Absolute Priority Rule’ in Jagdeep Bhandari & Lawrence Weiss (eds), Corporate Bankruptcy: Economic and Legal Perspectives (1996) at 113.
[28] Delaney, above n18 at 71.
[29] Delaney, id at 79.
[30] In re Johns-Manville Corp 68 B R 618 (1986), 621–622. As of 31 December 1995, the trust had received over 280 000 claims. The Plan predicted the trust would receive between 83 000 and 100 000 claims during the life of the trust. Manville Personal Injury Settlement Trust — History: <http://www.mantrust.org/history.htm> (12 January 2003). A report issued by the trust in May 2001 indicated that the number of claims was still increasing. During 2000 new claims totalling 59 200 were filed with the trust which represented an 82 per cent increase in volume over the 32 500 claims filed during 1999, and was the greatest volume of claims received in any year since 1989, the first full year the trust received claims.
[31] In Re Joint Eastern & Southern, above n13 at 754 (Weinstein J).
[32] Pursuant to the Court’s decision in In re Joint Eastern and Southern, Findley v Falise 878 F Supp 473 (1995), the trust is required to undertake a re-estimation of the pro rata share at least every three years. On 19 June 2001 the trustees decided to reduce the pro rata payment percentage from 10 to 5 per cent in view of the expanding number of claims being filed. See: <http://www.mantrust.org/FTP/REDUMEM2.pdf> (18 April 2003).
[33] Richard Marcus, ‘Symposium: They Can’t Do That, Can They? Tort Reform via Rule 23’ (1995) 80 Cornell LR 858 at 859.
[34] Judicial Conference of the US Ad Hoc Comm on Asbestos Litig, Report of Ad Hoc Comm. on Asbestos Litig (1991) at 19–34.
[35] Coffee, above n18 at 1389.
[36] Coffee, id at 1392.
[37] Georgine v Amchem Prods, Inc 157 F.R.D. 246; Coffee, id at 1393.
[38] This occurs because class actions under Rule 23 FRCP are based upon an opt-out procedure. An opt-in procedure is typified by the joinder provisions which are available in most courts, eg, ACT SCR O19 r 10, NSW SCR Pt 8.13, FCR O 6 r 2. These provisions are more restrictive than class action procedures because the parties must have the same interest and the words ‘same ... series of transactions’ have involved some fatal constraints, such as where applicants participated in only one of the series of transactions. But the basic quality of these procedures is that the parties who are represented must take positive steps to be part of the proceedings and to be bound by the judgment. Contrast that with an opt-out procedure. In this procedure the represented parties are described rather than named. Therefore the class will be formed by reference to a particular description, eg, ‘people who purchased X Ltd’s peanut butter products from x date to y date and who suffered personal injury’. By virtue of the doctrine of res judicata, where an opt-out procedure is used, everyone who comes within the description is part of the class and will be bound by the judgment unless he or she takes positive steps to not be part of the class, ie, to opt-out. Section 33E of the Federal Court Act 1976 (Cth) states that no consent is required to be a group member with certain exceptions, eg, the Commonwealth, Ministers of the Crown etc. See Carnie v Esanda Finance Corporation Limited [1995] HCA 9; (1995) 182 CLR 398.
[39] Coffee, above n18 at 1393. The class was defined to include ‘all persons ... who have been exposed in the United States or its territories ..., either occupationally or through occupational exposure of a spouse or household member, to asbestos ... for which one or more of the defendants may bear legal liability and who ... have not, as of January 15, 1993, filed a lawsuit for asbestos-related personal injury or damage ... against the defendant(s)’: Georgine, 157 FRD at 319, discussed in Ortiz v Fibreboard [1999] USSC 65; 527 US 815 (1999) at 827.
[40] Preliminary Injunction, Joint Appendix 1049 & 1050, in Coffee, above n18 at 1393.
[41] 1995 US Dist LEXIS 11062 (E D Tex, 27 July 1995). Note that the Ahern v Fibreboard proceedings were named Ortiz v Fibreboard before the US Supreme Court.
[42] Coffee, above n18 at 1399–1400. A spin-off occurs when an existing corporation distributes shares in a subsidiary it previously controlled to its own shareholders. The shareholders can decide to retain the shares or to on-sell them. It is often used by companies who wish to scale down diversified corporate groups.
[43] By 1995 the number had soared to approximately 200 000 (Notice of Class Action, Global Settlement and Third-Party Claimant Class Settlement and Hearing at 17, Ahearn v Fibreboard Corp, No 6:93cv526, 1995 U S Dist LEXIS 11062 (E D Tex, 27 July 1995), cited in Coffee, above n18 at 1400).
[44] Notice of Class Action, Global Settlement and Third-Party Claimant Class Settlement and Hearing, Ahearn v Fibreboard Corp No 6:93cv526, 1995 U S Dist LEXIS 11062 (E D Tex, 27 July 1995), 27.
[45] Federal Rule of Civil Procedure (US) 23(b)(1)(B) permits a mandatory class action to be certified where ‘the prosecution of separate actions ... would create a risk of ... adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests.’
[46] Coffee, above n18 at 1402.
[47] See Report of the Guardian Ad Litem, Eric D Green at 68, Ahearn (No 6:93cv526) in Coffee, id at 1402.
[48] Although, as demonstrated by the Manville example above, the bankruptcy context, at least as regards Chapter 11, is by no means unproblematic.
[49] Coffee, above n18 at 1402.
[50] Ortiz, above n39 at 845.
[51] [1997] USSC 67; 521 US 591 (1997).
[52] In particular the predominance requirements under Rule 23(b)(3) and adequate representation under Rule 23(a)(4).
[53] Ortiz, above n39 at 815.
[54] Souter J delivered the opinion of the court, in which Rehnquist CJ, and O’Connor, Scalia, Kennedy, Thomas, and Ginsburg JJ joined. Rehnquist CJ filed a concurring opinion, in which Scalia & Kennedy JJ joined. Breyer J filed a dissenting opinion, in which Stevens J joined.
[55] Ortiz, above n39 at 833 (Souter J).
[56] Ortiz, above n39 at 834 (Souter J).
[57] Newberg on Class Actions §4.09 at 4–33.
[58] Ortiz, above n39 at 838.
[59] Ortiz, above n39 at 841.
[60] Henry Monaghan, ‘Antisuit Injunctions and Preclusion Against Absent Nonresident Class Members’ (1998) 98 Columbia Law Review 1148 at 1164. Souter J also quoted Richard Marcus who had stated ‘the original concept of the limited fund class does not readily fit the situation where a large volume of claims might eventually result in judgments that in the aggregate could exceed the assets available to satisfy them’. Later in the quoted article, Marcus draws further on the bankruptcy analogy by arguing that the justification for the use of Rule 23(b)(1)(B), when the defendant’s assets were insufficient to cover all the claims, has the attractiveness of inviting something resembling a bankruptcy cram-down to cope with the expected shortfall of assets. Marcus, above n33 at 877. For an interesting discussion on bankruptcy cram-downs and future claims see Jeffrey Davis, ‘Cramming Down Future Claims in Bankruptcy: Fairness, Bankruptcy Policy, Due Process and the Lessons of the Piper Reorganisation’ (1996) 70 American Bankruptcy Law Journal 329.
[61] [1997] USSC 67; 521 US 591 (1997), 613.
[62] Ortiz, above n39 at 845–846. The Seventh Amendment provides: ‘In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved’.
[63] Ortiz, above n39 at 846.
[64] Phillips Petroleum v Shutts [1985] USSC 176; 472 US 797 (1985), 812.
[65] Anthony Hughes, ‘Hardie Cleans Up Its Asbestos Act’ Sydney Morning Herald (17 February 2001) at 51.
[66] Ben Hill, ‘Every Breath You Take’ Sydney Morning Herald (27 February 2001) at 11.
[67] Hill, ibid.
[68] CSR Ltd, Annual Report to Securities and Exchange Commission, 31 March 2001: <http://www.csr.com.au/investorcentre/Reports.asp> (12 January 2003) at 51.
[69] Anthony Hughes, ‘Healthy Hardie Profit Boosts US Roadshow’ Sydney Morning Herald (9 February 1999) at 21.
[70] Hughes, ibid.
[71] Anthony Hughes, ‘Hardie US Float In Trouble’ Sydney Morning Herald (5 March 1999) at 21.
[72] Chanticleer, Australian Financial Review (5 January 2000) at 48.
[73] James Hardie Australia Pty Ltd, above, n11.
[74] Anthony Hughes, ‘Hardie Cleans Up Its Asbestos Act’ Sydney Morning Herald (17 February 2001) at 51.
[75] Hughes, ibid. See also James Hardie Australia Pty Ltd, ‘The Medical Research And Compensation Foundation’, Press Release, 16 February 2001: <http://www.ir.jameshardie.com.au/JH_ir/news/factsheetMRCF.htm> (12 January 2003).
[76] James Hardie, Notes to Consolidated Financial Statements, 2002 Annual Report: <http://www.ir.jameshardie.com.au/jh_ir/pdf/2002/Financials/09Notes_to_Financials.pdf> (12 January 2003) at 59. See also James Hardie, Notes to the Financial Statements, 2001 Annual Report: <http://www.ir.jameshardie.com.au/JH_ir/pdf/AR2001_NOTES_TO_THE_FIN_STATEMENTS.pdf> (12 January 2003) at 55.
[77] The deposits at Wittenoom had been discovered by Lang Hancock and his companies began pick and shovel mining there in 1936.
[78] With the exception of a few shares issued to the directors of ABA.
[79] CSR v Young, above n7 at 64952 (Handley JA).
[80] Ibid. In that case, the plaintiff's family had moved to Wittenoom in May 1959. The plaintiff (Mrs Olson) was born in September 1959 and was exposed to blue asbestos from birth until the age of 27 months. Her father was employed by ABA as a draftsman and frequently returned from work with asbestos fibres on his clothing. The back yard where the children played was spread with tailings which contained asbestos fibre. Mrs Olson was diagnosed as suffering from malignant mesothelioma at the age of 34 years. She died nine months later.
[81] CSR v Young, above n7 at 64942–624947 (Handley JA).
[82] B Snell, ‘The Wittenoom Disaster’, Management of Dust Hazards and Diseases, Safety Line Institute: <http://www.safetyline.wa.gov.au/institute/level2/course21/lecture95/l95_05.asp> (12 January 2003).
[83] Snell, ibid.
[84] CSR Ltd, Annual Report to Securities and Exchange Commission, above n68 at 52.
[85] Anthony Hughes, ‘CSR Rejects Hardie-style Asbestos Fund’ Sydney Morning Herald (22 May 2001) at 9.
[86] CSR Ltd, Annual Report to Securities and Exchange Commission, above n68 at 10.
[87] CSR Ltd, id at 59.
[88] The main task of administrators is to convene a series of creditors’ meetings which decide the company’s future. These meetings must be convened within a short period. Section 439B(2) of the Corporations Act 2001 (Cth) provides that the creditors’ meetings should take place within 60–88 days from the date of appointment.
[89] Philip Crutchfield, Corporate Voluntary Administration Law (1997) at 67–68.
[90] Andrew Keay, Insolvency: Personal and Corporate Law and Practice (3rd ed, 1998) at 277.
[91] Ian F Fletcher, ‘Administration Orders Under the Insolvency Act 1986’ (1994) 2 Insolvency Law Journal 110.
[92] David Brown, Corporate Rescue (1996) at 57.
[93] Brown, id at 58.
[94] Kent Anderson, ‘Small Business Reorganizations: An Examination of Japan’s Civil Rehabilitation Act Considering US Policy Implications and Foreign Creditors’ Practical Interests’ (2001) 75 The American Bankruptcy Law Journal 355 at 403.
[95] Enterprise Act 2002 (UK) s248 para 27.
[96] Enterprise Act 2002 (UK) s248 paras 53, 54, 55.
[97] In Australia the court has power to make orders where the proceedings are being abused (Corporations Act 2001 (Cth) s447A(2)(b)), where the administrator is managing the company’s affairs in a manner prejudicial to the company’s creditors (Corporations Act 2001 (Cth) s447E(1)), or generally to protect creditors (Corporations Act 2001 (Cth) s447B). In the UK, creditors may apply to the court to challenge an administration where the administrator is acting so as to ‘unfairly harm the interests of the applicant’ Enterprise Act 2002 (UK) s248 para 74.
[98] For example, Bright v Femcare [2002] FCAFC 243 where a group of 61 women have sued the manufacturer of the Filshie clips. Another example is the action brought against a group of three tobacco manufacturers in Philip Morris (Australia) Ltd v Nixon [2000] FCA 229. The applicants claimed that they had contracted a smoking-related disease in consequence of being influenced by the respondents’ conduct to begin or continue smoking. However, the Full Federal Court found that the action could not continue as a group proceeding because Federal Court Act 1976 (Cth) Part IVA does not contemplate group proceedings against multiple defendants.
[99] See, for example, Johnson Tiles Pty Ltd v Esso Australia Ltd [1999] FCA 56.
[100] Compare mass torts to securities class actions or consumer class actions where the number of affected people may be large but each person’s loss is too small to justify individual proceedings. In relation to securities class actions in Australia, see Peta Spender, ‘Securities Class Actions: A View from the Land of the Great White Shareholder’ (2002) 31 Common Law World Review 123.
[101] Both sections 33ZA (ie, s33ZA of the Federal Court Act 1976 (Cth) and s33ZA of the Supreme Court Act 1986 (Vic)) state as follows:
Constitution etc of fund
(1) Without limiting the operation of subsection 33Z(2), in making provision for the distribution of money to group members, the Court may provide for:(a) the constitution and administration of a fund consisting of the money to be distributed and
(b) either:(i) the payment by the respondent of a fixed sum of money into the fund; or
(ii) the payment by the respondent into the fund of such instalments, on such terms, as the Court directs to meet the claims of group members; and
(c) entitlements to interest earned on the money in the fund.
(2) The costs of administering a fund are to be borne by the fund, or by the respondent in the representative proceeding, as the Court directs.
(3) Where the Court orders the constitution of a fund mentioned in subsection (1), the order must:(a) require notice to be given to group members in such manner as is specified in the order; and
(b) specify the manner in which a group member is to make a claim for payment out of the fund and establish his or her entitlement to the payment; and
(c) specify a day (which is 6 months or more after the day on which the order is made) on or before which the group members are to make a claim for payment out of the fund; and
(d) make provision in relation to the day before which the fund is to be distributed to group members who have established an entitlement to be paid out of the fund.
[102] [1999] FCA 104 (28 January 1999).
[103] The sum of $750 000 was to constitute a fund to be distributed amongst the members of the group who did not opt out of the proceeding and who could establish that they had suffered an injury as a result of consuming contaminated food products manufactured by the respondent (a hot bread bakery). The fund was to be administered by Mr Ian Hone, a solicitor employed by Slater & Gordon, the solicitors for the applicant. Each member of the group was required to submit a written claim verified by medical reports or medical certificates. The quantum of damages to which each group member was entitled would then be assessed and the fund distributed pari passu. Any decision made by Mr Hone under the settlement scheme was not subject to review by the court.
[104] [2000] FCA 1925 (22 December 2000).
[105] Carnie v Esanda Finance Corporation Limited [1995] HCA 9; (1995) 182 CLR 398, Wong v Silkfield Pty Ltd [1999] HCA 48 (9 September 1999) and Mobil Oil Australia Pty Ltd v Victoria [2002] HCA 27 (26 June 2002).
[106] Femcare Ltd v Bright [2000] FCA 512 (19 April 2000).
[107] Schutt Flying Academy (Australia) Pty Ltd v Mobil [2000] VSCA 103 (8 June 2000).
[108] Federal Mogul Corporation, ‘Federal-Mogul Corporation Files Voluntary Chapter 11 And Administration Petitions to Resolve Asbestos Claims’, Press Release (1 October 2001): <http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=105 & STORY=/www/story/10-01 – 2001/0001581778> (12 January 2003).
[109] Federal Mogul Corporation, ‘Federal-Mogul Wins Four Contracts Valued at More Than $20 Million Annually’ Press Release (12 October 2001): <http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=105 & STORY=/www/story/10 – 12 – 2001/0001590776> (12 January 2003).
[110] Formerly Turner & Newall Ltd.
[111] Between 1920 and 1976, T&N was the largest British employer in the asbestos industry. By 1950 T&N had achieved a virtual monopoly position in the UK asbestos industry; in 1955 T&N’s market share of the sales of asbestos cement products was 75 per cent and 50 per cent of friction materials. For a time T&N’s sales overtook Johns-Manville. In 1959, while Johns-Manville had sales of $304.1 million, T&N had sales of $450 million. L Kazan-Allen, ‘T&N Ltd’: <http://www.btinternet.com/~ibas/Frames/f_lka_tn_dev.htm> (12 January 2003).
[112] Kazan-Allen, ibid. See also G Tweedale, Magic Mineral to Killer Dust: Turner and Newall and the Asbestos Hazard (2000).
[113] London Hazards Centre, above n20 at Chapter 9.
[114] Paul Durman, ‘Bid report boosts T&N share price’ The Times of London (17 June 1997) at 29.
[115] Andrew Lorenz, ‘Federal Mogul gears up for T&N takeover battle’ Sunday Times — London (28 September 1997) at Business 2.
[116] George Sivell, ‘T&N silent on £1.23bn Federal bid’ The Times of London (10 March 1999) at 27.
[117] Carl Mortished, ‘Big investors unhappy over Pounds 1.5bn T&N bid’ The Times of London (17 October 1997) at 25.
[118] Carl Mortished, ‘City lets home-grown success story fall to the Americans’ The Times of London (17 October 1997) at 29.
[119] John Waples (ed), ‘T&N’ Sunday Times — London (15 February 1998) at Business 4.
[120] James Moore, ‘Federal-Mogul forced into administration’ The Times of London (2 October 2001) at 26.
[121] Patience Wheatcroft, ‘Asbestosis’ The Times of London (2 October 2001) at 25.
[122] Frances Gibb, ‘Asbestos firm freezes payouts for victims’ The Times of London (12 November 2001) at 13. However, on 10 May 2003 the English High Court ruled that claims for asbestos-related diseases were covered by T&N’s insurance policy. Robert Orr and Nikki Tait, ‘RSA and Lloyds Face Millions in Asbestos Payments’, Financial Times (10 May 2003) at 1.
[123] Early Day Motion No 423, Turner & Newall and Compensation Claims For Asbestos-Related Disease, House of Commons, 14 November 2001: <http://edm.ais.co.uk/weblink/html/motion.html/EDMI_SES=01/ref=423> (12 January 2003).
[124] Mark Roe, ‘Bankruptcy and Mass Tort’ (1984) 84 Columbia Law Review 846 at 847–848 discussing the judgment in In re UNR Indus 29 Bankr 741, 744, 746 (N D Ill 1983).
[125] Tony Honoré, Responsibility and Fault (1999) at 71.
[126] Peter Cane, Responsibility in Law and Morality (2002) at 44.
[127] Ernest Weinrib, The Idea of Private Law (1995) at 142–144.
[128] Honoré, above n125 at 73. Clearly the obligation to put matters right is complex. However, in the present context it would include the payment of individual loss by way of damages or agreed settlement. Cane argues that the process of deciding what sanction ought to attach to any particular finding of legal liability provides important opportunities for the law, by establishing ‘scales’ or ‘degrees’ of responsibility, to modify and fine-tune responsibility judgments made in adjudicating upon liability. Cane, above n126 at 44. Clearly the aggregation of claimants will undermine such responsibility judgments.
[129] Cane, above n126 at 281.
[130] With regard to corporate insolvency, some have argued that tortious liability should be regarded as something different in kind to other debts and that shareholders should be liable in particular circumstances for tort claims. See, for example, Henry Hansmann & Reinier Kraakman, ‘Towards Unlimited Shareholder Liability for Corporate Torts’ (1991) 100 Yale LJ 1879 at 1919; Robyn Carroll, ‘Corporate parents and tort liability’ in Michael Gillooly (ed), The Law Relating to Corporate Groups (1993) 91. See also the statements of Rogers AJA in Briggs v James Hardie & Co Ltd (1989) 7 ACLC 841 at 863–864.
[131] For example, as discussed above, the Manville Trust only pays 5 per cent of a claimant’s entitlement. See <http://www.mantrust.org/FILINGS/Q3_01/3RDQTR01.HTM> (12 January 2003).
[132] The example provided above was the shift by the employees of Johns-Manville from their employer to CSR, ie, from the manufacturer to the mining company.
[133] Douglas Baird, ‘The Uneasy Case for Corporate Reorganisations’ in Jagdeep Bhandari & Lawrence Weiss (eds), Corporate Bankruptcy: Economic And Legal Perspectives (1996) at 339.
[134] Douglas Baird & Thomas Jackson, ‘Corporate Reorganisations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy’ 51 (1984) UChiLR 97 at 100.
[135] For example, Douglas Baird, Thomas Jackson, Lucien Bebchuk & Barry Adler.
[136] Baird, above n133 at 339.
[137] Veli Jukka Kilpi, The Ethics of Bankruptcy (1998) at 13. Note that in the Manville reorganisation, the moratorium placed upon claims against the corporation (as opposed to the Trust) was enforced by channelling injunctions. A channelling injunction has been described in the following way:
A channeling injunction steers claimants toward a trust or pool of assets to compensate claimants as it simultaneously steers those claimants away from the reorganized entity. ... The channeling injunction reinforces the effect of the discharge while it clearly directs claimants toward a specific fund.... Without the imposition of a channeling injunction, claimants might attempt to pursue individual suits against defendants, unwinding the benefits of collective action and equality of treatment ...
National Bankruptcy Review Commission, Bankruptcy: The Next Twenty Years, Final Report of the National Bankruptcy Review Commission (1997) at 345–346.
[138] Kilpi, id at 13.
[139] Keay, above n90 at 17.
[140] See, for example, Frederick Tung, ‘Taking Future Claims Seriously: Future Claims and Successor Liability in Bankruptcy’ (1999) 49 Case Western Reserve Law Review 435 at 482–483.
[141] Kilpi cites a range of responses to ‘going broke and breaking promises’ such as forgiveness and utilitarianism. Kilpi, above n137 at 68–72.
[142] Keay, above n90 at 499.
[143] National Bankruptcy Review Commission, above n137 at 318–319.
[144] Alan Resnick, ‘Bankruptcy as a Vehicle for Resolving Enterprise-Threatening Mass Tort Liability’ (2000) 148 University of Pennsylvania Law Review 2045 at 2050.
[145] Smith, above n24 at 370.
[146] Smith, ibid.
[147] [1999] USSC 65; 527 US 815 (1999).
[148] S Elizabeth Gibson, ‘A Response to Professor Resnick: Will this Vehicle Pass Inspection?’ (2000) 148 University of Pennsylvania Law Review 2095 at 2107.
[149] Gibson, id at 2117.
[150] Amchem Products Inc v Windsor 521 US591 (1997), 613.
[151] Roe, above n124 at 877–878.
[152] As stated by her Honour Edith Jones in ‘Rough Justice in Mass Future Claims: Should Bankruptcy Courts Deliver Tort Reform?’ (1998) 76 Tex LR 1695 at 1713:
In bankruptcy, as in future claims class actions, the claimants are absent, invisible, and passive, creating room for exploitation in several ways. The class representative ... operates without the supervision or control of real clients. Because the claims themselves are not concrete, but rather amorphous and conjectural, the representative’s bargaining position is inherently weak. The representation of future claims thus carries with it a tendency toward conflicts of interest. There is no vigorous check on a class representative’s accepting a settlement that provides generous fees for the representative but modest relief for the class. A conflict may arise if the representative undertakes to settle claims of both present and future ‘future’ claimants.
[153] Compare Gregory Bibler, ‘The Status of Unaccrued Tort Claims in Chapter 11 Bankruptcy Proceedings’ (1987) 61 American Bankruptcy Law Journal 145 at 150–161 with Ralph Mabey & Jamie Gavrin, ‘Constitutional Limitations on the Discharge of Future Claims in Bankruptcy’ (1993) 44 South Carolina Law Review 745 at 755–759.
[154] Matthew Stiegler, ‘The Uncertain Future of Limited Fund Settlement Class Actions in Mass Tort Litigation After Ortiz v. Fibreboard Corp’ (2000) 78 North Carolina Law Review 856 at 886. See also J Tidmarsh, Mass Tort Settlement Class Actions: Five Case Studies (1998) at 77–78 (discussing the failure of a $4.23 billion multi-defendant settlement of breast implant claims caused by a massive underestimation of claim volume).
[155] A judge of the US Bankruptcy Court captured the problem with the following statement:
Many commentators now assume that mass tort bankruptcy cases must follow a certain script: first estimate aggregate tort claims; then negotiate a fund to satisfy it; and finally, devise a procedure for fairly apportioning the funds. ... But there are good reasons to question the premise upon which the standard mass tort model for reorganization rests. The model rests on the shaky foundation that judges can accurately estimate the results of a series of extremely speculative problems. While one court ‘seems’ to have pulled it off (A.H. Robins), at least another has predictably failed (Johns-Manville):
Spector J, In Re Dow Corning 211 BR 545 (1997), 562.
[156] Thomas Jackson, The Logic and Limits of Bankruptcy Law (1986) at 193–194.
[157] Delaney, above n18 at 59.
[158] Smith, above n24 at 373.
[159] Smith, ibid.
[160] Jones, above n152 at 1722.
[161] Anderson, above n94 at 403.
[162] Corporations Act 2001 (Cth) s447A.
[163] See, for example, Maritime Union of Australia v Patrick Stevedores Operations No 1 Pty Ltd (1998) 153 ALR 602 (North J) and on appeal at Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; (1998) 153 ALR 643. See generally Peta Spender, ‘Scenes from a Wharf: Containing the Morality of Corporate Law’ in F McMillan (ed), International Corporate Law Volume 1 (2000) 37.
[164] Lynn Lo Pucki & George Triantis, ‘A Systems Approach to Comparing US and Canadian Reorganization of Financially Distressed Companies’ 35 (1994) Harvard International Law Journal 267 at 282.
[165] Jeffrey Davis, ‘Cramming Down Future Claims in Bankruptcy: Fairness, Bankruptcy Policy, Due Process and the Lessons of the Piper Reorganisation’ (1996) 70 American Bankruptcy Law Journal 329.
[166] See generally Susan Cantlie, ‘Preferred Priority in Bankruptcy’ in Jacob Ziegel (ed), Current Developments in International and Comparative Corporate Insolvency Law (1996) at 413.
[167] In Australia s556(1)(f) of the Corporations Act 2001 (Cth) provides that priority on liquidation is accorded to ‘amounts due in respect of injury compensation’. However, ‘injury compensation’ is defined in s9 of the same Act to mean ‘compensation under any law relating to workers compensation’. The priority rules in s556 must be applied by an administrator in a deed of company arrangement, pursuant to para 4, Schedule 8A of the Corporations Regulations (Cth). In the UK, s175 of the Insolvency Act 1986 (UK) only extends priority to workers compensation and sick leave payments. This provision applies to administration by virtue of para 65, s248 of the Enterprise Act 2002 (UK). In the US, s507 of the Bankruptcy Code only allows a priority of up to $4650 for sick leave pay.
[168] Coffee, above n18 at 1402.
[169] John Farrar, Corporate Governance in Australia and New Zealand (2001) at 158.
[170] Lynn LoPucki & W Whitford, ‘Bargaining over equity’s share in the bankruptcy reorganization of large, publicly held companies’ in Jagdeep Bhandari & Lawrence Weiss (eds), Corporate Bankruptcy: Economic And Legal Perspectives (1996) 232 at 257.
[171] LoPucki & Whitford, ibid.
[172] Georgiadis v Australian and Overseas Telecommunications Corp (1994) 179 CLR 297; Cmth v Mewett (1997) 146 ALR 299. Although this decision does not apply to the States, it does recognise that future claims have juridical value.
[173] David Capper, Mareva Injunctions (1988) at 3.
[174] [1999] HCA 18 (6 May 1999)[1999] HCA 18; , (1999) 162 ALR 294.
[175] Id at para 42.
[176] In a similar vein, a settlement was finally effected between the South African victims of another major UK asbestos manufacturer, Cape plc, in March 2003. Settlement agreements totalling £10.7 million will be divided among 7500 members of a group action brought in England by people who were occupationally or environmentally exposed to asbestos in South Africa, reported in Lubbe v Cape plc [2000] UKHL 41; [2000] 4 All ER 268. Although it was conceded that once the money is divided up, it will amount to ‘next to nothing’, the plaintiffs’ solicitor Richard Meeran, agreed that a smaller settlement had to be negotiated with Cape because of the company’s precarious financial situation. See Peter Muchlinski, ‘Corporations in International Litigation: Problems of Jurisdiction and the United Kingdom Asbestos Case’ (2001) 50 ICLQ 1; Laurie Kazan-Allen, ‘Cape PLC To Compensate Foreign Plaintiffs’: <http://www.btinternet.com/~ibas/Frames/f_lka_cape_comp_forgn_pla_0303.htm> (18 April 2003).
[177] Kenneth Abraham, ‘Individual Action and Collective Responsibility: The Dilemma of Mass Tort Reform (1987) 73 VaLR 845.
[178] Jonathan Macey & Geoffrey Miller, ‘The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform’ (1991) 58 UChiLR 1 at 3.
[179] John Battle MP, Member of Parliament for Leeds West, Asbestos in Armley: <http://www.johnbattle – mp.org.uk/asbestos/asbestos.html> (12 January 2003).
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/SydLawRw/2003/11.html