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The Effect of Joint and Several Liability on the Bankruptcy Rate of Defendants: Evidence from Asbestos Ligation

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  • Anup Malani

    (University of Virginia)

Abstract

The Effect of Joint and Several Liability on the Bankruptcy Rate of Defendants: Evidence from Asbestos Litigation - Under the doctrine of joint and several liability, if two defendants jointly share a liability and the first becomes insolvent, his unpaid liabilities may be reallocated to the second, solvent defendant. While the second defendant's assets may be sufficient to cover his own share of the liability, they may be insufficient to also cover the first defendant's unpaid liability. As a result the first defendant's insolvency may trigger the second defendant's insolvency (White 2002, Cupp 2003). The purpose of this paper is to quantify the pressure that one defendant's bankruptcy places on the solvency of co-defendants in the context of mass torts subject to joint and several liability. The specific tort we examine is asbestos poisoning. We choose this example because of the large number of companies -- over 61 since 1982 (Stiglitz et al. 2003) -- that have gone bankrupt due to asbestos litigation and the even larger number of companies -- perhaps as many as 8,000 (Brickman 2004) -- that have been named as defendants in asbestos suits. Using 10-K data from a number of large asbestos defendants and a data set of all judgments in asbestos trials, we estimate that the mean per-claim payments by major defendants grew an additional 5 to 10 percent annually or 56 to 157 percent altogether between 1990 and 2002 due to the bankruptcy of jointly liable defendants during this period. To put it another way, if no companies had gone bankrupt between 1990 and 2002, the asbestos liabilities of solvent defendants might have been less than two-fifths their present size.This result is also a contribution to the literature on bankruptcy and on mass torts. First, numerous scholars have suggested tort claimants ought to be given superpriority in bankruptcy to reduce their exposure to the risk of a defendant's insolvency. We demonstrate that, with joint and several liabilities, this risk is actually reallocated to jointly liable but solvent defendants. Tort superpriority would reallocate some of this risk to other creditors, which seems neither fair nor efficient. Second, in the debate over how to compensate victims of mass tort -- case-by-case litigation, class actions, valuation in bankruptcy, or legislative trust -- one criticism of piecemeal litigation has been that it leaves the plaintiff bearing the risk of defendant insolvency. Our findings provide evidence otherwise in the case of joint and several liabilities

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Paper provided by University of Virginia School of Law in its series University of Virginia John M. Olin Program for Law & Economics Working Paper Series with number uvalwps-1010.

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Handle: RePEc:bep:uvalwp:uvalwps-1010

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Web page: http://www.law.virginia.edu/home2002/html/index.htm

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  1. Joseph E. Aldy & W. Kip Viscusi, 2004. "Age Variations in Workers' Value of Statistical Life," NBER Working Papers 10199, National Bureau of Economic Research, Inc.
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