Tobacco Giants May Turn to Bankruptcy, Experts Say
Cigarette makers, among the most profitable U.S. companies, may end up turning to the bankruptcy courts for protection against an expected surge in smoking-related lawsuits, legal experts say.
Last week two states took steps against tobacco producers to make them pay for health costs arising from smoking.
Philip Morris Cos. and R.J. Reynolds Tobacco Co. played down the chances of taking the bankruptcy route.
But lawyers see a chance for a repeat of the move that saved asbestos makers from the worst financial effects of cancer-related lawsuits.
“Tobacco companies are very healthy. They’re robust. Yet they could find themselves contemplating bankruptcy if civil lawsuits turn against them,” said Elizabeth Warren, who teaches bankruptcy law at the University of Pennsylvania.
Another law professor, Daniel Polsby of Northwestern University, likens the companies’ current situation to “a balloon in a room full of needles.”
Lawyers said the situation is reminiscent of the flood of asbestos-injury lawsuits that pushed Manville Corp., until then financially healthy, into filing for Chapter 11 bankruptcy protection in 1982. The company had been called Johns-Manville when it made asbestos.
Under Chapter 11 of the federal bankruptcy code, a company retains control of its businesses while it reorganizes and settles debts with its creditors. Such bankruptcy protection can also be used to shelter a company’s assets from massive legal claims, as occurred in the case of Manville, which is again financially sound.
For tobacco companies, such a move could be years away and depends on whether the manufacturers start losing cases. But just a few defeats for the once-invincible industry could lead to a rapid preemptive strike, the legal experts predict.
“You’ll see them contemplating bankruptcy when they’ve lost only a few lawsuits if they perceive on the horizon there are literally tens of thousands of lawsuits. It will be an anticipatory move, a strategy,” Warren said.
But a spokesman for Philip Morris said the company does not think it will lose any of the civil actions and that the industry’s situation is not comparable to that of asbestos makers’.
Manville emerged from bankruptcy in 1988 after pioneering the use of bankruptcy protection to set up a trust to pay massive personal injury claims.
A.H. Robins Co., which made the ill-fated Dalkon Shield contraceptive device, took a similar route when it filed for bankruptcy protection in 1985.
“Johns-Manville and Robins have simply blazed the path for how to do that in a mass tort situation. This would be an ideal setting” for tobacco companies, Warren said.
Victor Han, the Philip Morris spokesman, said tobacco companies are not at the same risk because they have never paid a penny stemming from a judgment against them. He said the state actions are fundamentally the same as other cases the industry has won.
