2024 Could Make or Break ‘Cre ative’ Mass Tort Bankruptcies

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The Shift: 2024 Could Make or Break ‘Creative’ Mass Tort Bankruptcies

Last year, judges didn’t seem too keen on some of the tactical maneuvering on display in mass tort bankruptcies.

Judges dismissed the bankruptcies in cases involving Johnson & Johnson’s talcum powder and 3M’s combat earplugs, finding a lack of the requisite financial distress. Yet the U.S. Supreme Court appeared divided last month on the release of liability for the Sackler family at the center of Purdue Pharma’s $6 billion bankruptcy plan.

Although advocates for these bankruptcy strategies say they can be more efficient routes to payouts for claimants, some attorneys say judges are likely to shut down these more novel uses of the bankruptcy code.

The Conversation

The process Johnson & Johnson used to file for bankruptcy through a newly created subsidiary that assumes the legal liabilities of the parent company is known as a “Texas Two-Step” merger. The mechanism gained some attention from federal lawmakers in September, with a Senate hearing questioning the practice.

“If a company is going to be freed from its debts, there has to be some cost,” said Committee Chairman Dick Durbin, D-Illinois. “The company has to accept oversight of the bankruptcy court. It has to compensate its creditors according to their interests. It has to limit its operation during the course of the proceedings. Recently, certain corporations have decided they’d rather not accept that arrangement. They want all benefits of bankruptcy without the cost.”

Brown Rudnick partner David Molton said the theme he is seeing is a juxtaposition of being “overly creative with the code without a really hard statutory basis.”

“The appellate courts, and possibly the Supreme Court, and in Two-Step circuit courts, are pushing back against very aggressive uses of the bankruptcy code that impact individual rights,” said Molton, who represented claimants in several mass tort bankruptcies last year.

Judges snuffing out this litigation tactic would be welcome news for some plaintiffs attorneys. “I hope that the Texas Two-Step is on its last leg. Or drawing its last breath,” said Andy Birchfield, of Beasley Allen in Montgomery, Alabama, and an attorney for plaintiffs in talcum powder cases.

However, Stephen Hessler, head of Sidley Austin’s restructuring practice, said the process is under the strict supervision of bankruptcy courts. “From my perspective as a practitioner, what is largely missing from this debate is the centrality of bankruptcy court judges in enforcing accountability,” Hessler said. “To the extent that critical inquiry is directed at the important question of whether the bankruptcy code is susceptible to abuse, the massive disclosure and compliance obligations that Congress included in the Bankruptcy Code make it difficult for a corporate debtor to attempt to hide, much less successfully advance, an impermissible purpose.”

The Significance

Strategies such as third-party releases and the Texas Two-Step have been held up by some as more expedient alternatives to unwieldy litigation. In the Dec. 4 oral arguments before the Supreme Court, justices heard arguments over whether they should block Purdue’s bankruptcy plan that includes legal protections for the Sackler family, which owned the company whose OxyContin drug allegedly contributed to the opioid crisis. Justices Brett Kavanaugh and Elena Kagan noted that the deal could provide quick relief for victim-creditors.

“I think what the opioid victims and their families are saying is you, the federal government, with no stake in this at all, are coming in and telling the families, no, we’re not going to give you payment, prompt payment, for what’s happened to your family … for this somewhat theoretical idea that they’ll be able to recover money down the road from the Sacklers themselves,” Kavanaugh said. “I guess I’m not sure why we should cast aside that concern so readily.”

The questions raised in the SCOTUS hearing highlight that the court, and American society at large, are grappling with the ideals of economic justice, accountability, and a fresh start through bankruptcy, according to Bankruptcy attorney Monique Hayes of DGIM Law.

“Perhaps most interesting is how the issues were framed, in the questioning of some of the justices. For example, Justice [Brett] Kavanaugh seemed to question whether the ‘federal government’, by objecting to the settlement, was delaying or denying ‘prompt payment’ to victims of the opioid crisis, while some of Justice [Ketanji] Brown Jackson’s questions went to the heart of whether those perceived to be most culpable for the crisis should ever be entitled to ‘these kinds of releases,’” Hayes said.

In a Dec. 13 column, The New Jersey Law Journal Editorial Board said the court will be left to grapple with ambiguous statutory language and considerations of practicality. “As noted by the justices at oral argument, the decision could upset many apple carts where the circumstances are less egregious than this case. They will have to decide both whether this kind of deal can be “appropriate” under the Bankruptcy Code and, if it can be, the standard by which the lower courts should determine whether is appropriate in a particular case,” the board wrote, except for Editorial Board Chairman Rosemary Alito, who recused herself from the column.

The Information

Want to know more? Here's what we've discovered in the ALM Global Newsroom:

Mass Tort Bankruptcies Stumbled in 2023. Could Some Fall Apart in 2024?

'Texas Two-Step' Is Only Path to Talc Claim Payouts, J&J Litigation VP Tells Senate Panel

Justices Appear Hesitant to Block $6 Billion Bankruptcy Plan for Purdue Pharma

Critical Mass With Law.com’s Amanda Bronstad: Could SCOTUS Split On Purdue Bankruptcy? As One Roundup Trial Winds Up, Another Begins

The OxyContin Bargain

Four Ways the Texas Two-Step Changes How Plaintiffs Litigate Mass Torts

Litigators of the Week: In Largest MDL to Date, 3M Settles for $6B With Veterans

Claiming Hearing Damage

Controversial 'Texas Two-Step' Netted Jones Day $107 Million Before 3rd Circuit Rebuke

The Forecast

If the Texas Two-Step and third-party liability releases continue, plaintiffs attorneys will also likely shift their strategies in response.

In a column, Mark Eveland said the Texas Two-Step could affect how plaintiffs' attorneys budget for litigation. Retaining costly bankruptcy specialists, whose fees could easily top seven or eight figures, is an expense that didn’t exist for plaintiffs counsel leadership teams a few years ago, Eveland wrote.

“Additionally, many plaintiffs firms rely on litigation funding to help defray the substantial costs of mass tort litigation,” he wrote. “However, if defendants limit their potential liability through a Texas Two-Step, litigation funding companies may reduce their appetite to fund mass tort cases because plaintiffs’ recoveries—and, in turn, funding companies’ returns on their investments—will be limited to whatever cash a defendant has put in their spun-off liability subsidiary.”

But the high costs could also create broader ripples for mass tort practices by preventing smaller or newer plaintiffs firms from developing mass tort practices, according to Eveland. “It could also spur the birth of a new kind of funding that takes the place of traditional litigation funding,” he wrote.

Alaina Lancaster is the Editor-in-Chief, Regional Coverage and The Recorder. Contact her at alancaster@alm.com. On Twitter: @a_lancaster3.