By C. Richard Newsome, R. Frank Melton, II, and William C. Ourand
Right now, certain companies are feverishly working to deny Takata airbag victims their day in Court. Their method of attack is a “channeling injunction”– a bankruptcy oddity spawned by asbestos litigation. It is imperative for everyone representing individuals injured or killed by Takata airbags to actively engage in the bankruptcy and take the necessary steps to protect their clients’ rights.
This article will discuss and analyze the proposed channeling injunction and other key recent events in the bankruptcy proceeding, and will then provide suggestions for protecting your clients’ rights.
I. The Takata Bankruptcy and the Proposed Channeling Injunction
Takata, the airbag supplier at the heart of the largest automotive recall ever conducted, declared bankruptcy this past June. Since then, there has been a flurry of complex legal actions filed throughout the world— including bankruptcy actions filed in Delaware, Japan, Canada, and elsewhere. Takata also filed a separate but related “adversary action” in which it sought, and obtained, an injunction against the prosecution of all state court cases involving a Takata airbag. The injunction has drastically extended the automatic bankruptcy stay to reach beyond Takata and include all claims against Honda and other automakers— referred to as the “Original Equipment Manufacturers,” or “OEMs” for short.
Just before midnight on Friday, November 3, 2017, Takata filed its Chapter 11 Plan of Reorganization. The Plan is a 289-page document which lays out Takata’s proposed reorganization after being purchased by Key Safety Systems, a rival automotive component part supplier. The Plan specifically includes a Channeling Injunction and the complete release of all claims against Takata and any OEM which chooses to participate.
To establish the groundwork for the Channeling Injunction, the Plan first calls for the creation of a trust fund for airbag inflator injury and death claims. Any OEM which chooses to pay into the trust fund gets to become a “Protected Party”—meaning that the Bankruptcy Court would provide the OEM with a complete and total release of all potential personal injury or wrongful death claims involving a defective Takata airbag inflator equipped in one of their vehicles.
If put into place, the Channeling Injunction would forcibly funnel all future airbag rupture claims involving vehicles produced by a “Participating OEM” into the trust. This means that the victims and their families would be unable to pursue a lawsuit against either Takata or the vehicle manufacturer. Instead, they would be forced to file an administrative-style claim with the trust. The trust, in turn, would provide a pre-determined amount of compensation based on a settlement value matrix. The matrix would be based on several categories of injuries, and would essentially provide a range of possible awards for each category.
At the time of this writing, the settlement value matrix has not been made public, and is being prepared in complete secrecy. The vast majority of current injury victims have been provided no notice of or input in this process.
II. The Channeling Injunction is Unnecessary and Lacks Valid Legal Support in this Context
Channeling injunctions have been used in asbestos litigation and a few other rare “mass torts.” Their use is almost always controversial and should only occur in the most extreme of circumstances. The lawsuits against OEMs for injuries and deaths caused by Takata airbags simply do not fit those extreme circumstances.
The Bankruptcy Code only contains one provision which allows for a channeling injunction. That provision is Section 524(g), and it is specific to only asbestos cases. Of course, asbestos is an incredibly unique situation. Individual asbestos manufacturers often faced tens or hundreds of thousands of lawsuits brought by those suffering from mesothelioma—an incredibly painful and lethal form of cancer. The financial toll of these claims was immense. Congress’ decision to pass 524(g) was the direct result of the unusual challenges presented by asbestos litigation. Critically, Section 524(g) also contains specific safeguards—including the requirement that a supermajority of 75 percent of the existing claimants vote in favor of the injunction.
Given that Section 524(g) is specific to asbestos, the Takata Reorganization Plan instead calls for the Channeling Injunction to be implemented pursuant to Section 105(a) of the Bankruptcy Code. Section 105(a) enables the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the bankruptcy code. The use of Section 105(a) to enact a channeling injunction to release non-debtors is even more controversial than the asbestos-specific channeling injunction contained in 524(g). There is currently a circuit split as to whether Section 105(a) provides such authority. The Fifth, Ninth, and Tenth Circuit Courts of Appeal have all clearly held that Section 105(a) does not provide authority to release non-debtors. Other Circuits, however, have allowed for non-debtor releases under Section 105(a) under varying circumstances, applying either a case-by-case analysis or a set of specific factors.
The Delaware Court overseeing the Takata Bankruptcy sits within the Third Circuit Court of Appeal. We believe a strong argument can be made that existing Third Circuit precedent forbids the use of Section 105(a) to impose the type of channeling injunction sought in the Takata Reorganization Plan. Among other things, we believe that a channeling injunction is particularly inappropriate in this case because:
- Certain OEMs allegedly engaged in separate and distinct tortious conduct as compared with the Debtors, including by allegedly failing to meet their own specific reporting obligations under the TREAD Act, and by allegedly concealing the dangerous defect for more than a decade. It would be unlawful and inequitable for Takata’s bankruptcy to shield those certain OEMs from liability for their own alleged independent misconduct.
- The facts and circumstances of this litigation, including the number of lawsuits which have been and are likely to be filed, simply do not warrant the extraordinary relief sought. Other litigations where such injunctions have been entered, e.g. asbestos, have involved true “mass torts” with thousands or tens of thousands of lawsuits and claimants. The Takata airbag inflator injury and wrongful death litigation is nothing like the asbestos litigation.
- The Channeling Injunction appears to be the product of the joint effort between the Debtors and certain OEMs to design and execute the Bankruptcy proceeding in such a manner as to shield the OEMs from liability moving forward. Evidence supporting this joint effort includes the fact that the Debtors allegedly never looked elsewhere for operational funding—including traditional DIP funding sources—and instead allegedly sought to become financially dependent upon operational funding provided by certain OEMs.
- The Channeling Injunction, if ratified by the Court, would serve as a dangerous road map for future cases. Manufacturers would know that they can buy off their liability without ever having to face a civil jury by simply contributing relatively modest amounts (compared with their potential liability in civil lawsuits) to secure a channeling injunction.
- The Channeling Injunction violates the constitutional rights of current and future victims of the airbag inflator defect by denying those individuals the right of access to the c.ourts.
III. Protecting Your Clients’ Cases
It is imperative for anyone with a Takata case to actively monitor and participate in the bankruptcy proceeding in order to safeguard and preserve their clients’ rights. For most plaintiffs’ attorneys, bankruptcy is a relatively unfamiliar area of law. There are numerous pitfalls which exist in any bankruptcy proceeding, and these hazards are compounded in this case because of the bankruptcy’s international magnitude and scope.
Our firm has retained multiple bankruptcy law firms. We have retained one firm located in Japan to help coordinate filing notices of claim in the Japanese proceeding. We have also retained another firm located in Delaware to help monitor and confirm deadlines, and to coordinate filings in the US bankruptcy proceeding. This has been a complicated and time-consuming process, and is still nowhere near complete at the time of this writing.
Critically, the Takata Bankruptcy Court will conduct a confirmation hearing sometime in the next few months. This is when the Court will either approve or disapprove of the Reorganization Plan, including the Channeling Injunction. To ensure a voice at the hearing, personal injury victims must timely file all required notices and proofs of claim. This will enable those individuals to object to the Reorganization Plan and the Channeling Injunction. It will also provide those victims with an opportunity to present arguments against the legal validity and constitutionality of the Channeling Injunction.
The Takata Bankruptcy has been fraught with hazards for the true victims of the airbag inflator debacle. The latest and most severe concern is the possible implementation of the unprecedented proposed Channeling Injunction which would forever close the courthouse doors to the victims. It is imperative that anyone representing clients who have suffered injuries due to a defective Takata airbag inflator be actively engaged in the bankruptcy proceeding.
1In re: TK Holdings, Inc., et al., Case No.: 17-11375, D.E. 1 (June 25, 2017).
2Matt Chiappardi, Takata Gets Nod on Unusual Bankruptcy Financing Deal, Law360, available at https://www.law360.com/articles/970070/takata-gets-nod-on-unusual-bankruptcy-financing-deal (Oct. 2, 2017).
3See In re: TK Holdings, Inc., et al., Case No.: 17-50880, D.E. 117 (Nov. 6, 2017).
4In re: TK Holdings, Inc., et al., Case No.: 17-11375, D.E. 1108 (Nov.6, 2017).
6Id. at 115-17.
7Id. at 81.
8Id. at 115-17.
1111 U.S.C. §524(g).
12Joshua M. Silverstein, Overlooking Tort Claimants’ Best Interests: Non-Debtor Release In Asbestos Bankruptices, 78 U.M.K.C. L. Rev. 1, 55 (Fall 2009).
1211 U.S.C. §524(g)(2)(B)(ii)(IV)(bb).
1311 U.S.C. §105(a).
15Eric Anderson and Jay Basham, Please Release Me, Let Me Go: Eleventh Circuit Embraces Third-Party Release Standards, 34-6 ABIJ 20 (June 2015).
16See In re Combustion Eng’g, Inc., 391 F.3d 190, 237 (3d Cir. 2004).
C. Richard Newsome
Mr. Newsome is the managing partner of the Newsome Law Firm,
representing consumers who have been catastrophically injured
by defective products. Mr. Newsome has published dozens of
articles about the law and practice of product liability litigation that
have received national recognition. Mr. Newsome was the 2010 – 2011 FJA President.
R. Frank Melton, II
Mr. Melton is the managing partner of Newsome Melton, P.A. in Orlando. He is a graduate of Stetson University and the University of Florida, Levine College of Law. Frank prosecutes products liability cases nationwide from Florida to Hawaii and everywhere in between. Frank and his firm have been at the forefront of the Takata litigation since its inception and have handled more rupture injury cases than any other firm in the nation.
William C. Ourand
Will Ourand graduated magna cum laude from the Florida State University College of Law where he served for two years on the editorial board of the Law Review. After graduation, he was inducted into the Florida State Chapter of the Order of the Coif. He is currently an associate at Newsome Melton, where he represents consumers in products liability and class action lawsuits.
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