PUBLIC CITIZEN ANALYSIS: Bankruptcy Filing by Tobacco Companies Could Stall Payments to States, Create Havoc with Current and Future Claims

July 14, 2000

PUBLIC CITIZEN ANALYSIS: Bankruptcy Filing by Tobacco Companies Could Stall Payments to States, Create Havoc with Current and Future Claims

If the full verdict $145 billion verdict or a significant portion of it is allowed to stand, it is entirely possible that one or more tobacco companies could declare bankruptcy. A tobacco company could seek reorganization under Chapter 11, even if it is solvent and has a positive net worth — perhaps even before appeals are completed.

Public Citizen?s legal experts have followed the case closely and can talk about the ramifications of one or more of the tobacco companies declaring bankruptcy. Please call Public Citizen?s Communications Office at 588-7703 or -7742 to arrange an interview.

Declaring bankruptcy would mean:

1) The tobacco companies could stave off further litigation. Filing for bankruptcy acts as an automatic stay of all litigation against a company but not against other non-filing tobacco companies. However, it seems certain that the other companies would also seek a stay and could well get it. Although a stay can be lifted, and would be lifted for certain routine cases (a car accident by a tobacco company driver), it almost certainly would not be lifted for a major class action. The stay also applies to cases in which the company is a plaintiff, such as those challenging billboard ad bans.

The stay would apply to the federal government?s suit aimed at recovering its costs of treating sick smokers. The court where the bankruptcy is pending may also have the power to order that case transferred from Washington, D.C., where it is now pending, to where the bankruptcy is filed.

2) All state cases, including the Florida class action, would be removable to the federal court and transferred to the district where the bankruptcy was pending, which could be Richmond, Greensboro or Louisville. This certainly would be less favorable to plaintiffs than the court in Miami with a state court jury.

3) Once a company files for Chapter 11, it is forbidden from paying prior debts without court approval (it can pay for current needs, such as supplies and labor). The biggest debt for these companies is the amount owed to the states under the 1998 settlement and to the attorneys for the states. The prospect of a delay or cancellation of those payments could produce some interesting alignments. Under the master settlement agreement, each company is liable only for its share, so if only one company files for bankruptcy, it is the only company that does not have to pay its share.

But since the “bankrupt” company will not have to pay out those sums while in Chapter 11, it could, in theory, cut its prices to increase market share and profits (and addict more children along the way).

Possible Scenarios

If one or more of the companies were to file for bankruptcy, it is likely that there would be pressure for a “global settlement” with an end to all litigation, and with liability and compensation taking the back seat. There are people who think the bankruptcy court would impose restrictions on the company to keep it from using marketing tactics that attract young people. But that possibility seems remote. In most bankruptcy cases the existing management remains in charge, and the company keeps on operating without paying its existing debts (including bank debt) or dividends. So don?t look for any changes imposed by the bankruptcy court. In fact, in bankruptcies filed by Dow Corning and A.H. Robins, the companies did very nicely. But there is no way of telling about tobacco. It is also possible that the companies may be structured in such a way that a United States tobacco subsidiary can file for bankruptcy while the rest of the company goes on as before.

If there is a bankruptcy, then everyone with an existing claim must file it or lose the right to do so later. The law is very unclear about what would happen to smokers who have no current claim, because they are not sick now. Must they or even can they file now, and if not, what happens to their rights? There is a special provision applicable only to asbestos claims that sets up a way to deal with future claims like these, and there surely will be a big fight over that issue for tobacco products. And this does not even begin to deal with suits by foreigners injured by U.S. products. In short, it will be a big mess.