Scarlet-Lettered Bankruptcy: A Public Benefit Proposal for Mass Tort Villains

Financially distressed companies in the US often seek refuge in federal bankruptcy court to auction valuable assets and pay creditor claims. Mass tort defendants – including Purdue Pharma, Johnson & Johnson, Boy Scouts of America, and USA Gymnastics – introduce new complexities to customary dynamics in US bankruptcy cases. Many mass tort defendants engage in malfeasance that inflicts widescale harm. These debtors fuel public scorn and earn a scarlet letter that can destroy value for an otherwise profitable business. Scarlet-lettered companies could file for bankruptcy and quickly sell their assets to fund victims’ settlement trusts. In a recent article I argue, however, that this traditional resolution option would eviscerate victim recoveries. Harsh public scrutiny has diminished the value of the resources necessary to satisfy claims, creating a discount that must be borne by victims.

My public benefit proposal charts a new course. Instead of accepting fire sale prices and an underfunded settlement trust, the scarlet-lettered company could emerge from bankruptcy as a corporation for the public benefit – an incorporation option available in most US states. This modified reorganization offers victims the greatest recovery. The continued operation preserves value during a transition period, after which the going concern can be sold efficiently. Further, assets that have been tainted by tortious conduct are cleansed behind a philanthropy shield and sold to capture the value rebound. The victims’ collective is the owner of the new company and can participate in a shareholder windfall if there is strong, post-bankruptcy performance. 

Therefore, at the forefront of a new trend in aggregate litigation, my article proposes a public benefit alternative to traditional resolution mechanisms. This approach delivers utility that will support the application of the proposed solution in a variety of contexts, assuming certain governance safeguards are maintained. In our new age of greater personal and corporate accountability, more scarlet-lettered companies will emerge and ultimately land in bankruptcy. The need to address the disposition of tainted assets will be paramount in compensating mass tort victims trying to reassemble fractured pieces. My article explains this new phenomenon and reconceptualizes resolution dynamics in a way that will have policy implications that transcend aggregate litigation.

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