Bankruptcy: Shield against Future Liability Suits?

By Daniel Fisher Bloomberg News | THE JOURNAL RECORD, February 5, 1998 | Go to article overview

Bankruptcy: Shield against Future Liability Suits?


Daniel Fisher Bloomberg News, THE JOURNAL RECORD


BAY CITY, Mich. -- When Dow Corning filed for Chapter 11 bankruptcy protection in 1995, it sought solutions to two problems, not just one.

The company already was spending millions of dollars defending itself against more than 10,000 lawsuits filed by women who said its silicone breast implants made them sick.

But Dow Corning faced the potential of even more lawsuits from the estimated 400,000 women who received implants between the early 1960s and 1992 and hadn't yet sued. By filing for bankruptcy, Dow Corning hopes to settle the lawsuits against it as well as the ones it hasn't seen, possibly for pennies on the dollar. If it succeeds, more companies facing product-liability suits may head for Chapter 11. "What it does is give you a way to separate yourself from future liability," said Thomas Smith, a bankruptcy expert at the University of San Diego School of Law. Bankruptcy may become even more popular in the wake of a U.S. Supreme Court decision limiting the ability of companies to end future litigation with class-action settlements. Lawyers negotiating last year's $368.5 billion settlement with the tobacco industry were worried enough to include a clause that prevents the companies from escaping payments by filing for bankruptcy during the 25-year accord. Plaintiffs' lawyers, of course, don't like it when their targets head for Chapter 11. "The bankruptcy code was never intended to be used as a litigation strategy," said Richard Laminack, whose Houston law firm has handled many of the Dow Corning implant suits. Unfortunately for some legal claimants, that's exactly what bankruptcy lets companies do. In theory, bankruptcy law requires a company to pay off all its creditors in full or hand over ownership to settle the bill. Dow Corning -- a joint venture of Dow Chemical and Corning -- has some 400,000 women seeking payment and less than $6 billion in assets. The most it could pay is about $13,000 per claim, far less than many women are seeking. That would mean that Dow Chemical and Corning would have to give their stock in the venture, once valued at some $800 million, to the implant claimants. Usually, however, the two sides in bankruptcy work out a compromise. While bankruptcy law gives unsatisfied claimants the power to take control of a company in the end, it also gives management the power to delay that day of reckoning for years. That puts pressure on plaintiffs' lawyers to reach an agreement that preserves some of the value of the company for its original shareholders while paying out as much cash as possible to their clients -- and themselves, in the form of fees. …

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