Silencing Litigation Through Bankruptcy

Introduction

From Johnson & Johnson (J&J) and Purdue Pharma, to the Boy Scouts of America, USA Gymnastics and the Catholic Church, bankruptcy has increasingly become a tool for powerful companies (and the individuals that own and operate them) to quickly and efficiently settle lawsuits—which we term onslaught litigation. In our forthcoming article, Silencing Litigation Through Bankruptcy, we detail how companies leverage the chapter 11 bankruptcy process to gather together those who allege harm and, using the forces of the reorganization process, pressure enough of them to settle their claims. Chapter 11’s relatively expeditious process offers the alluring prospect of depriving those who allege harm the opportunity to have their voices heard and of keeping the public from learning the full truth. We argue that these two outcomes are what companies that turn to chapter 11 to deal with onslaught litigation seek, even if they do not say so. Through a review of bankruptcy’s benefits, along with a deep dive into recent chapter 11 cases filed to deal with onslaught litigation, we shed light on this abusive use of bankruptcy. We also propose a framework for how onslaught litigation can (if ever) be resolved using chapter 11.

Bankruptcy and Onslaught Litigation

We define onslaught litigation as lawsuits involving multiple plaintiffs against the same defendant or group of defendants where the claims are related to the same wrongful conduct. Taken as a whole, the enormity of the claims presents the possible paralyzing of the defendants (either financially or operationally) over the long-term—often times requiring the individual or company to devote tremendous resources to the litigation because of the public attention that it draws.

The use of chapter 11 for resolving large-scale litigation traces to lawsuits regarding asbestos, IUDs, and breast implant products liability. Bankruptcy provided the defendants in these cases the chance to resolve claims, including future claims, arising out of the defective product, typically through the creation of a trust fund from which such claims would be paid on an on-going basis.

As we explain, the acceptance of this procedure created the conditions necessary for companies to leverage the same process in the context of a wider range of onslaught litigation. Beginning with Catholic Dioceses in the early 2000s, the chapter 11 process has been deployed in an attempt to deal with, at least in part, onslaught litigation by the Weinstein Companies, Bikram Yoga, USA Gymnastics, the Boy Scouts of America, Purdue Pharma, InfoWars and Alex Jones, 3M, and J&J.

The Allure of Bankruptcy’s Benefits

Chapter 11 bankruptcy has five noteworthy features in the context of onslaught litigation. First, the filing of the petition activates the automatic stay, which temporarily pauses pending lawsuits and prohibits the filing of new ones. Second, the bankruptcy court will establish a date by which people or entities who assert claims against the debtor must submit those claims. This provides clarity and finality as to the universe of claims against the debtor. In the context of onslaught litigation, it forces people to come forward when they may not yet be ready, such as in the case of sexual abuse, or when their harm may not yet have manifested, as in the case of certain products liability.

Third, the debtor can ask the court to estimate the value of claims that are not apparent at the time of the case, but that may arise in the future. For the resolution of onslaught litigation, valuing claims as a whole sets parameters for total monetary liability, a finality that inures to the company’s benefit.

Fourth, a chapter 11 case typically ends with the proposal and confirmation of a reorganization plan. In the context of onslaught litigation, that plan will incorporate settlements reached with survivors and will send claimants to a trust for payment and to deal with their claims. Bankruptcy law requires that classes of creditors vote in favor of the plan, by which a certain number of creditors owed a certain percentage of claims can agree to the plan and its related apparatus and thereby force dissenting creditors to abide by the plan’s terms.

Fifth, and perhaps now most important in the context of onslaught litigation, through approval of the plan, the court can order discharges, third party releases, and channeling injunctions. These resolve the debtor company’s liabilities. They also release third parties who themselves do not file bankruptcy from related claims. These third parties can include directors, officers, companies’ owners, insurance companies, and related entities, such as Catholic parishes. Third party releases are what individual members of the Sackler family requested (and received) in the Purdue Pharma bankruptcy.

Recognizing Harms

This use of bankruptcy produces significant harms. It has a profound impact on procedural justice. Procedural justice supports the participation and dignity values that are vital for people to perceive legal processes as legitimate. The swiftness of the chapter 11 process, the manner in which claims are bundled and resolved, and how parties are categorized and bound to the plan create conditions ripe to leave those who allege harm feeling short-changed. Without procedural justice, they and others more generally lose faith in the legal system.

The chapter 11 process also cuts short the public airing of wrongs that would normally happen in the much more drawn-out context of civil litigation. Instead, deals are worked out among creditors’ representatives and lawyers around a conference table, leaving little ability and time for information about the companies’ alleged wrongdoings to become public. In the context of onslaught litigation, bankruptcy has become a public relations management tool. 

Formulating Solutions

Chapter 11 reorganization was not built with onslaught litigation in mind. To rein in this use of chapter 11, we propose that when faced with a bankruptcy filing related to onslaught litigation, it should be presumed that the filing was not made in good faith and should be dismissed. Nonetheless, we recognize there may be instances in which bankruptcy can serve as an appropriate forum for resolving claims that arise in onslaught litigation. We thus propose a framework for how and when chapter 11 can and should be used for these purposes.

If the debtor can overcome the presumption of lack of good faith in filing, then the chapter 11 case should be allowed to proceed, but only under a comprehensive set of conditions. These conditions include a public admission of wrongdoing by the debtor company or individual, the unavailability of preliminary injunctions for third parties, the unavailability of third-party releases and channeling injunctions, the presumptive appointment of an examiner, the availability of the appointment of multiple claims representatives, the ability to opt-out of any settlements, and the elimination of the ability to engage in anything similar to the Texas Two-Step legal maneuver.

Our proposed framework aims to preserve the benefits of the chapter 11 system for businesses and individuals dealing with onslaught litigation when appropriate, but without depriving survivors and the public of the ability to both speak and know the truth.

Pamela Foohey is a professor of law at the Benjamin N. Cardozo School of Law at Yeshiva University.

Christopher K. Odinet is the Josephine R. Witte professor of law at the University of Iowa College of Law.