Modern mass tort defendants—including Johnson & Johnson, Purdue Pharma, USA Gymnastics, and Boy Scouts of America—have developed unprecedented techniques for resolving mass tort cases; innovation coupled with exploitation. Three weapons in this new arsenal are particularly noteworthy.

Before a filing, divisive mergers allow mass tort defendants to access bankruptcy on their terms. Texas state law allows a corporation to divide into two separate entities and freely allocate assets and liabilities between these new entities. Defendants are using this corporate mitosis to isolate mass tort liabilities in one subsidiary and then have that entity file for bankruptcy while keeping the rest of the corporate empire outside the process. Last month, Johnson & Johnson—which boasts a roughly $440 billion (USD) market value—executed a divisive merger in order to isolate all liability related to its talcum powder business in LTL Management, which filed for federal bankruptcy on October 14.  

Once in bankruptcy, mass restructuring debtors curate advantageous provisions in the US Federal Bankruptcy Code to craft their own ad hoc resolution mechanism implemented through plans of reorganization. Bankruptcy judges are approving these Frankenstein creations pursuant to their equitable powers under section 105 of the Code. This maneuver heightens the risk of prematurely insolvent victim trusts and facilitates questionable outcomes, including the third-party releases the Sackler family recently secured in the Purdue Pharma bankruptcy case.

Finally, in order to minimize its financial contribution to a victims’ settlement trust, a mass restructuring debtor can agree to convert its tainted business into a public benefit company after bankruptcy and devote future profits—no matter how speculative they may be—to victims. Purdue pursued this approach and arguably overestimated the reorganized entity’s value. Based on that error, the Sackler family was afforded a $2 billion reduction in the amount of funds they are required to contribute to the victims’ settlement trust in that case. This credit does not appear to be commensurate with the value victims will ultimately receive.

The net effect of these legal innovations is difficult to assess because the intricacies are not fully understood. Debtors argue that these resolution devices provide accelerated and amplified distributions. And forum shopping has landed cases before accommodating jurists willing to tolerate unorthodoxy. The fear, however, is that mass tort victims are being exploited. The aggregation of these maneuvers may allow culpable parties to sequester funds outside of the bankruptcy court’s purview and then rely on statutory loopholes to suppress victim recoveries. Mass restructuring debtors are also pursuing victim balkanization—an attempt to pit current victims against future victims in order to facilitate settlements that may actually create disparate treatment across victim classes.

My article ‘Mass Exploitation’ (University of Pennsylvania Law Review Online, Vol. 170, 2021 (forthcoming)) is the first to identify and assess the new shadowed practices in mass restructuring cases, providing perspective on interdisciplinary dynamics that have eluded academics and policymakers. This is one of the most controversial legal issues in the country today, but there is scant scholarship exploring improvement of the flawed machinery. My article seeks to create a dialogue to explore whether a legislative or judicial response is necessary and what shape such a response could take.

 

Samir D. Parikh is Professor of Law at Lewis & Clark Law School.

This post was first published at the Harvard Law School Bankruptcy Roundtable here.