    [Senate Hearing 117-881]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-881

                         ABUSING CHAPTER 11: CORPORATE
                              EFFORTS TO SIDE-STEP
                       ACCOUNTABILITY THROUGH BANKRUPTCY

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON FEDERAL COURTS,
                          OVERSIGHT, AGENCY ACTION AND
                                 FEDERAL RIGHTS

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                FEBRUARY 8, 2022

                                   __________

                              Serial No. J-117-51

                                   __________

             Printed for the use of the Committee on the Judiciary

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                            www.judiciary.senate.gov
                                www.govinfo.gov

                                    __________

                       U.S. GOVERNMENT PUBLISHING OFFICE
    56-422 PDF                  WASHINGTON : 2025

    -----------------------------------------------------------------------------------

                           COMMITTEE ON THE JUDICIARY

                       RICHARD J. DURBIN, Illinois, Chair
    PATRICK J. LEAHY, Vermont            CHARLES E. GRASSLEY, Iowa, Ranking
    DIANNE FEINSTEIN, California             Member
    SHELDON WHITEHOUSE, Rhode Island     LINDSEY O. GRAHAM, South Carolina
    AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
    CHRISTOPHER A. COONS, Delaware       MICHAEL S. LEE, Utah
    RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
    MAZIE K. HIRONO, Hawaii              BEN SASSE, Nebraska
    CORY A. BOOKER, New Jersey           JOSH HAWLEY, Missouri
    ALEX PADILLA, California             TOM COTTON, Arkansas
    JON OSSOFF, Georgia                  JOHN KENNEDY, Louisiana
                                         THOM TILLIS, North Carolina
                                         MARSHA BLACKBURN, Tennessee
                 Joseph Zogby, Chief Counsel and Staff Director
          Kolan L. Davis, Republican Chief Counsel and Staff Director

                   SUBCOMMITTEE ON FEDERAL COURTS, OVERSIGHT,
                        AGENCY ACTION AND FEDERAL RIGHTS

                    SHELDON WHITEHOUSE, Rhode Island, Chair
    PATRICK J. LEAHY, Vermont            JOHN KENNEDY, Louisiana, Ranking
    MAZIE K. HIRONO, Hawaii                  Member
    CORY A. BOOKER, New Jersey           LINDSEY O. GRAHAM, South Carolina
    ALEX PADILLA, California             MICHAEL S. LEE, Utah
    JON OSSOFF, Georgia                  TED CRUZ, Texas
                                          BEN SASSE, Nebraska
                                         THOM TILLIS, North Carolina

                      Annie Owens, Majority Staff Counsel
                    Nathan Williams, Minority Staff Counsel

                               C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page

    Whitehouse, Hon. Sheldon.........................................     1
    Kennedy, Hon. John...............................................     3

                                   WITNESSES

    Fitzgerald, Hon. Judith K........................................     4
        Prepared statement...........................................    26
        Responses to written questions...............................    74
    Maclay, Kevin C..................................................    10
        Prepared statement...........................................    38
        Responses to written questions...............................    79
    Naranjo, Kimberly Ann............................................     6
        Prepared statement...........................................    56
    Skeel, David A. Jr...............................................     5
        Prepared statement...........................................    61
        Responses to written questions...............................    96
    Zumbro, Paul H...................................................     9
        Prepared statement...........................................    70
        Responses to written questions...............................    99

                                    APPENDIX

    Items submitted for the record...................................    25

                         ABUSING CHAPTER 11: CORPORATE
                              EFFORTS TO SIDE-STEP
                       ACCOUNTABILITY THROUGH BANKRUPTCY

                                  ----------

                           TUESDAY, FEBRUARY 8, 2022

                                  United States Senate,
                     Subcommittee on Federal Courts, Oversight,
                             Agency Action, and Federal Rights,
                            Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice at 3:06 p.m., in
    Room 226, Dirksen Senate Office Building, Hon. Sheldon
    Whitehouse, Chairman of the Subcommittee, presiding.
        Present: Senators Whitehouse [presiding], Hirono, Ossoff,
    Kennedy, and Tillis.
        Also present: Senators Durbin and Blumenthal.

             OPENING STATEMENT OF HON. SHELDON WHITEHOUSE,

             A U.S. SENATOR FROM THE STATE OF RHODE ISLAND

        Chair Whitehouse. The hearing will come to order. I thank
    all of our witnesses for being here. We are in the middle of a
    vote sequence over in the Senate, and so you'll see people
    appear and disappear, as they have to come from and return for
    votes. I thank Senator Kennedy for allowing us to get underway
    as he is on his way over here, and I will take the time to do a
    little bit of housekeeping, particularly with respect hearing
    exhibits. With consent, I will ask for the Reuters article,
    ``Special Report: Inside J&J's secret plan to cap litigation
    payouts to cancer victims'' to be made an exhibit in this
    hearing.
        I will, with consent, get this Wall Street Journal article
    behind me also entered as an exhibit.
        I have two constituent letters from John ``Jay'' Erickson,
    Jr., of Newport, Rhode Island, whose late wife Geralyn passed
    away after a difficult battle against ovarian cancer, and John
    Tassone of Narragansett, Rhode Island, who has been diagnosed
    with mesothelioma and has undergone a major lung surgery. I
    will ask that both of those letters be made a part of the
    record of this hearing.
        We also have a letter of support from seven bankruptcy
    professors submitted to our Subcommittee for this hearing. The
    professors are Professors Ellias, Ayotte, Block-Lieb, Dick,
    Markell, Rasmussen, and Yadav, and their letter will be made
    part of the record.
        Finally, there is a brief in the United States Bankruptcy
    Court for the District of New Jersey filed by Dean Erwin
    Chemerinsky of the University California Berkeley School of
    Law, the dean of that school of law, and I will make his amicus
    curiae brief a part of the record here.
        I'll do some opening remarks. When he gets here, Senator
    Kennedy will then provide opening remarks. If Senator Durbin
    gets here first, he's the Chairman of the Full Committee and he
    may seek to offer some opening remarks. We'll have three rounds
    of opening remarks, with any luck, and then I'll introduce the
    panel, and you proceed with your testimony. Then we'll go on to
    questions. I will be pretty rigorous about the 5-minute rule. I
    know you've all put a lot of work into your statements. They
    can be made a part of the record so we have the full benefit of
    your full statement, but Senators who come to a hearing are
    eager to ask questions and engage with the panel, and moving to
    that quickly is a good thing for a Chairman to do. I will be a
    strict policeman of the 5-minute rule.
        We are here to address a novel and rather troubling
    circumstance that is emerging in bankruptcy law.
        Imagine that a big corporation wreaks serious harm on you
    and your family. You sue for damages to cover hospital bills or
    to care for a family member. When you do, you discover that
    your claim against the company, a company that is out there
    operating, apparently thriving, in the marketplace--your claim
    is somehow in bankruptcy court that may not be heard for months
    or years, and it may never be paid. Sadly, this situation is
    not imaginary. The so-called ``Texas Two-Step'' has mired tens
    of thousands of claims in bankruptcy proceedings.
        It's bankruptcy's aim to grant honest but unfortunate
    debtors a fresh start while doing the utmost to make creditors
    whole. In recent years, large corporations on solid financial
    footing have found a bankruptcy trick to shirk responsibility
    for hurting Americans.
        Here's how it works. First, a corporation with claims
    against it from people that have been harmed transforms into a
    Texas corporate entity. Second, that new entity exploits a
    Texas law allowing something called a ``divisive merger,''
    splitting the corporation into two corporations. Company one is
    saddled with the claims; company two takes the corporate
    assets.
        The company saddled with the claims then files for
    bankruptcy, perhaps in North Carolina where the Fourth Circuit
    makes it nearly impossible for victims to have the company's
    filing dismissed for bad faith. Victims harmed by the
    corporation are left in bankruptcy proceedings that can take
    years to resolve, condemned to receive only a fraction of what
    they're owed.
        Meanwhile, the company with the corporate assets continues
    business as usual, shed of the claims. That's the Texas Two-
    Step. Although, to be fair, the same thing can potentially be
    done under Delaware law.
        The originator of this move is perhaps the most prolific
    industrial polluter in American history, Koch Industries. In
    2017, it used the Texas Two-Step to dump its subsidiary's
    asbestos liabilities. Victims are still tied up in the
    bankruptcy process, as are asbestos claimants in ensuing
    copycat cases.
        Johnson & Johnson, one of the biggest and richest companies
    in the world, last year faced over 38,000 lawsuits alleging
    that its talc-based baby powder contained asbestos and caused
    ovarian cancer and mesothelioma. Johnson & Johnson followed the
    Koch Industries model and hatched a shell company that took on
    the talc liability and filed for bankruptcy. Johnson & Johnson
    now seeks a stay of all those claims, pending bankruptcy
    proceedings.
        This move presents four big concerns. First, it violates
    the fundamental principle of bankruptcy that a company is
    forgiven its debts, but it must offer up all its assets to
    creditors. Then it gets a fresh start. The Texas Two-Step
    separates the assets from the liabilities in violation of this
    basic principle.
        Second, it denies people their day in court. The civil jury
    has been a bastion of individual rights throughout our history,
    allowing people a vital check on the most powerful forces
    arrayed against them. The Texas Two-Step denies victims a jury
    of their peers, defeating the 7th Amendment in our Bill of
    Rights.
        Third, it encourages forum shopping. Johnson & Johnson had
    no particular reason to file for bankruptcy in North Carolina;
    in fact, Johnson & Johnson's Texan liability shell only existed
    for 2 days before it filed bankruptcy. Outcomes in court should
    not be determined by strategic forum shopping.
        Finally, the Texas Two-Step mires victims in protracted
    proceedings, robbing them of precious time. Asbestos victims
    can die of mesothelioma and other types of cancers before their
    claims are heard. That is a blot on our legal system.
        So far, this trick has hit asbestos victims, but once the
    Two-Step strategy catches on, it could deprive all sorts of
    victims of the compensation they're due and undermine the
    integrity of other creditor-debtor relationships. Hiding assets
    in a bankruptcy is a serious wrong. The Texas Two-Step uses a
    trick of corporate law to hide assets in plain view with
    courts' connivance.
        I thank Senator Kennedy for his bipartisan approach to this
    hearing. I hope that we can continue to work in bipartisan
    fashion to address this abuse of our bankruptcy process and to
    make sure that injured victims get their day in court as our
    Constitution entitles them to.
        Senator Kennedy, you are recognized for your opening
    remarks.

                OPENING STATEMENT OF HON. JOHN KENNEDY,

               A U.S. SENATOR FROM THE STATE OF LOUISIANA

        Senator Kennedy. Mr. Chairman, thank you for calling this
    hearing. Thanks to all of our witnesses for being here today. I
    look forward to their testimony, and I plan to listen and to
    learn. Thank you, Mr. Chairman.
        Chair Whitehouse. All right. Let us begin then with Judge
    Fitzgerald, a retired United States bankruptcy judge who served
    in the Western District of Pennsylvania from 1987 to 2013,
    including 5 years as the Chief Judge. While on the bench, she
    presided over more asbestos mass tort bankruptcy cases than any
    other bankruptcy judge. She's now a shareholder at the
    Pittsburgh-based law firm of Tucker Arensberg and a professor
    in the practice of law at the University of Pittsburgh School
    of Law, where she teaches courses in bankruptcy and advanced
    bankruptcy. Your Honor, thank you for being here. Please
    proceed with your statement.

                STATEMENT OF HON. JUDITH K. FITZGERALD,

                  SHAREHOLDER, TUCKER ARENSBERG, P.C.,

                        PITTSBURGH, PENNSYLVANIA

        Judge Fitzgerald. Thank you, Chairman Whitehouse, Ranking
    Member Kennedy, and all of the Members of the Subcommittee. I
    appreciate the opportunity to be here today to testify as you
    continue to work on issues related to abuse of bankruptcy and
    the impact of divisive mergers, and I appreciate the efforts
    that you are putting forth.
        I want to begin by noting that I see nothing improper with
    the State of Texas enacting a law authorizing a particular form
    of merger between companies or permitting the division of one
    company into two or more. Implementation of corporate law in
    policy customarily is a matter of State law. It is only when
    the corporate division separates out all of the troublesome
    liabilities into one company, that I refer to as BadCo, and
    puts the vast majority of the valuable assets into another
    company that I call GoodCo, and then BadCo files bankruptcy but
    GoodCo does not, that the problems and possible abuse arise.
        I want to emphasize three points today that deal the very
    essence of bankruptcy law. They are: first, bankruptcy relies
    on the good faith of the debtor to undergo a valid
    reorganization and to maximize the value of its assets and pay
    back value to creditors; two, bankruptcy relies on the debtor's
    complete disclosure of all assets and liabilities; and three,
    bankruptcy involves burdens and benefits which are intended to
    compensate creditors for what the debtor owes, in exchange for
    which the debtor can channel payments to a trust, discharge
    unpaid claims, and go about its business.
        First, the bankruptcy system relies on the good faith of
    debtors and requires that they utilize bankruptcy for valid
    reorganizational purposes and to maximize the returns they pay
    to their creditors. There is considerable concern today about
    the bona fides of solvent companies engaging in the Texas Two-
    Step for the sole purpose of sheltering their assets by putting
    BadCo into bankruptcy. It's important to note that a BadCo has
    no business to reorganize, and it is vested with insufficient
    assets to pay liabilities. Thus, the purposes of bankruptcy are
    not well served and the good faith of a BadCo bankruptcy is
    called into question.
        Second, the bankruptcy system relies on full and complete
    disclosure so that all transactions take place subject to court
    and public scrutiny. Yet there is nothing in the bankruptcy
    code that requires GoodCo to disclose the assets it acquired
    through the divisive merger. Only BadCo, the debtor that
    absorbed the troublesome liabilities with insufficient assets
    to pay them, must disclose.
        Nonetheless, when BadCo files bankruptcy, it invokes the
    full panoply of benefits that it enjoys as a debtor and takes
    every effort it can to extend those benefits to its entire
    corporate chain and others, even though those non-debtors have
    not subjected themselves to court oversight. This enables the
    original tortfeasors to avoid accountability for the harms they
    cause.
        Third, there is another harmful impact, particularly on
    tort victims, when, in the bankruptcy process, they are left
    with recovering only from BadCo. This harm would not exist but
    for the divisive merger because without the merger, if the
    original company filed bankruptcy, all of those assets and
    liabilities would be within the bankruptcy court's purview.
        The only purpose for which a BadCo bankruptcy is filed is
    to enable a solvent company allegedly responsible for injuring
    thousands of people to avoid litigating and proving its
    defenses in courts of law. The original solvent company uses
    BadCo as a shield from disclosure and then uses BadCo's
    bankruptcy as a sword against tort victims who are denied
    billions of dollars in assets that otherwise would be available
    to pay valid claims.
        A BadCo bankruptcy is not like other mass tort cases where,
    for example, the asbestos manufacturer itself goes into
    bankruptcy, accepts responsibility, and negotiates a plan to
    pay tort victims. BadCo bankruptcies are exactly the opposite.
    For example, J&J denies that its talc products were dangerous
    and caused thousands of women to develop ovarian cancer and
    mesothelioma, yet it formed LTL to act as its shield.
        In conclusion, I submit that Congress could find abuse of
    the bankruptcy system when the full benefits of bankruptcy are
    granted to a nondebtor, well-capitalized, solvent company
    which, to avoid responsibility for its harmful conduct,
    manufactures BadCo as a new company for the sole purpose of
    transferring the troublesome liabilities into it and then hides
    behind BadCo when it files bankruptcy.
        I thank you for this opportunity.
        [The prepared statement of Judge Fitzgerald appears as a
    submission for the record.]
        Chair Whitehouse. Thank you very much, Judge Fitzgerald. I
    appreciate it, and well done on the 5-minutes. I'm grateful to
    you.
        Our next witness is Professor David Skeel, the Samuel Arsht
    Professor of Corporate Law at the University of Pennsylvania
    Carey Law School. We will get beyond Pennsylvania with other
    witnesses, I promise you. He is the author of numerous articles
    on bankruptcy and financial distress, corporate law,
    Christianity and law, law and literature, and other topics.
    Since August 2016, he has served on the Financial Oversight and
    Management Board for Puerto Rico, which he currently chairs.
    Professor Skeel.

                   STATEMENT OF DAVID A. SKEEL, JR.,

                 S. SAMUEL ARSHT PROFESSOR OF CORPORATE

                 LAW, UNIVERSITY OF PENNSYLVANIA SCHOOL

                   OF LAW, PHILADELPHIA, PENNSYLVANIA

        Professor Skeel. Thank you very much. Thank you for the
    opportunity to testify today in this very, very important
    hearing that y'all are holding. It's needless to say a great
    honor to appear before you.
        The issue that we're focusing on today, the potential abuse
    of so-called Texas Two-Step transactions and other divisive
    mergers, is, in my view, one of the principal reasons for a
    growing backlash against perceived abuses in the Chapter 11
    reorganization process.
        The term divisive or divisional merger is an oxymoron.
    Rather than combining firms, divisive merger divides a firm's
    assets and/or its liabilities into two entities. In Texas Two-
    Step transactions, as in the controversial Johnson & Johnson
    case, the liabilities are shunted off into a new entity, and
    that new entity then files for bankruptcy. What this strategy
    is designed to do is to turn a company like Johnson & Johnson's
    consumer products business that would otherwise be liable into
    a third party, in a sense, and to obtain a giant third-party
    release, or what's sometimes called a non-debtor release.
        In a sense, what this is doing is manufacturing an
    opportunity for a nondebtor release. The opportunity for abuse
    and for undercutting the rights of victims and other creditors
    is obvious. One response to this is to rely on bankruptcy
    courts and bankruptcy judges to police abuses. Courts can
    dismiss a case if it was filed in bad faith and, in fact, a
    motion to do that is pending right now in the Johnson & Johnson
    transaction. Victims or other creditors can challenge the
    divisive merger as a fraudulent conveyance.
        Legislation was recently introduced in the House that would
    take a much more sweeping approach. The legislation would
    essentially bar the doors to bankruptcy for any divisive
    merger, whether or not it's abusive. I believe the better
    approach is to rely on the bankruptcy remedies rather than
    completely outlawing divisive mergers. Although the bankruptcy
    remedies are far from perfect, and I talk about some of the
    obstacles in my written testimony, in my view, they're adequate
    to the task.
        I could be wrong about this. Courts may fail to adequately
    police divisive mergers. If they do, legislative intervention
    can and would be warranted, but at this point, I don't think
    legislation is currently warranted, and I worry that any
    legislation might have unfortunate unintended consequences. I
    guess my conclusion is divisive mergers really do create a
    danger of abuse. They should be scrutinized carefully and, in
    appropriate cases, kicked out of bankruptcy, but in the first
    instance, I would rely on the courts to do that policing. Thank
    you.
        [The prepared statement of Professor Skeel appears as a
    submission for the record.]
        Chair Whitehouse. Thank you, Professor. Our next witness is
    Ms. Kimberly Naranjo, who comes to us from Sandy, Utah. She is
    a mom of seven--bravo--and prior to her mesothelioma diagnosis,
    she was a substance use disorder counselor with the Salt Lake
    County Sheriff's Department. Ms. Naranjo was also studying for
    a bachelor of science in marriage and family studies from
    Brigham Young University-Idaho prior to her diagnosis. She is a
    plaintiff in a talc lawsuit against Johnson & Johnson, and her
    claims have been stayed as part of Johnson & Johnson's
    bankruptcy filing. Ms. Naranjo, I'm very grateful that you took
    the trouble to travel here for this hearing in the situation
    which you find yourself, so thank you. Please proceed.

                   STATEMENT OF KIMBERLY ANN NARANJO,

                              SANDY, UTAH

        Ms. Naranjo. Thank you, Chairman Whitehouse, Ranking Member
    Kennedy, and Members of the Subcommittee. My name is Kimberly
    Naranjo and I'm here to ask you for your help in preserving my
    constitutional right and the rights of so many others to pursue
    accountability in our courts.
        I have been diagnosed with mesothelioma, which is a
    terminal cancer that's caused by one thing and one thing only,
    exposure to asbestos. I was given 12 to 16 months of life,
    which puts my expiration date at March 2023, 1 month before my
    50th birthday. I'm a single mother with two of my seven
    children still under the age of 18: Angelica, who is 14 and
    lives with a diagnosis of autism, and my son Jayce, who's only
    9. I would like to share my story with you.
        I was born into dysfunction. My biological mother was deep
    in her disease of addiction, and I experienced horrific abuse.
    I was in and out of foster care, passed around from family
    members, and on my own since I was 15.
        As a result of the trauma and abuse I experienced in my
    early years, family, being a good mother, and having stability
    was all I dreamed about. At the age of 19, I became pregnant
    with my oldest daughter, Maria, and then gave birth to four
    additional daughters, Adrianna, Monaliza, Faviola, and Karina,
    within the next 6 years. I wanted to be a good mom, something
    that I didn't have until my Aunt Cathy, who never gave up on
    me, took me in, and later adopted me as an adult. She has
    supported me my whole life and is right here behind me
    supporting me now.
        Although I did my best at being a good mother, the
    unhealthy behavior patterns that I had been exposed to in my
    early years started to manifest in my life. I needed to do
    something to stop the cycle. My adopted mom permanently took
    over caring for my five children, and I attended a residential
    treatment program where I lived for 13 months. I'm proud to say
    that next month I will celebrate 15 years of sobriety.
        After completing treatment, I gained enough skills to
    become a productive member of society. I decided that I wanted
    to get an education and dedicate the rest of my life helping
    others overcome their hardships. I graduated with highest
    honors with my associate's degree in alcohol and drug
    counseling and I started working as an addiction counselor.
    I've dedicated the last 7 years of my life helping and
    advocating for others. I didn't want to stop there; I continued
    my education at BYU-Idaho working toward a bachelor's degree in
    marriage and family studies. My goal was to get my master's
    degree in social work.
        I've worked very hard to break the cycle for my children,
    who I am blessed to have a wonderful relationship with today.
    Since my disease of addiction has been in remission, I have
    been an active and supporting participant in all their lives.
        Throughout my life, I have never lived in one residence
    longer than 2 years, and I wanted that to change. Last year, I
    purchased my first home, my forever home. I was also hired at
    my dream job, working for the Salt Lake County Sheriff's Office
    as an addiction counselor.
        Three days into working at the sheriff's department, I felt
    a pain in my side. The next week, I was diagnosed with
    mesothelioma. It all happened so fast. One week, I was enjoying
    my forever home, surrounded and celebrating life with my
    family. The next week, I was given an aggressive treatment plan
    in hopes to extend my life by a few months.
        Unfortunately, I was no longer able to work. With no
    income, I was unable to pay my mortgage and forced to sell my
    forever home. I then had to sit down with my children and
    grandchildren to let them know that I'm going to be leaving my
    body. It was a really hard day. My oldest daughter, Maria, is
    only 28 and a single mother, and she is going to raise my two
    children after my death.
        After spending hours going over every place I've ever lived
    or worked, it was determined that the only way I was exposed to
    asbestos was from Johnson & Johnson's baby powder. Instead of
    protecting my children as advertised by Johnson & Johnson, I
    had no idea I was exposing them and myself to the deadly
    asbestos in that white plastic bottle I associated with
    motherly love.
        When I learned that I could file a lawsuit and have it
    decided by a jury, I saw a path forward for my family. There
    was a way that my children could be taken care of monetarily as
    if I had lived. I was less scared knowing that even though I
    can't control the fact that I'm dying, I could use my
    constitutional right and be heard in a court of law. I knew
    that justice would take care of my family. I was filled with
    hope.
        That hope was also taken from me. I learned that Johnson &
    Johnson filed for bankruptcy and that I would not receive a
    court date. I didn't understand. Johnson & Johnson is a really
    big and thriving company. How can they be bankrupt? I learned
    that they took advantage of a loophole where they made a new
    company and put all their responsibilities related to Johnson &
    Johnson's baby powder into that company, then filed bankruptcy,
    and now everything's stopped except for the progression of my
    cancer.
        I have accepted the fact that I do not have much time left.
    I even held a living memorial where I gave all my friends an
    opportunity to say goodbye. I made parting gifts. When I
    graduated from residential treatment, I was given a poem that
    you can see right there--it's framed--don't quit. That's my
    motto. I made copies of that picture, little wallet-sized, and
    handed them out to all of my friends and everybody who came and
    celebrated my life with me.
        I don't have much time left, but I will not quit. Even
    though I'm in pain every day, I get up and do my best to make a
    difference in the world. I've even made myself a stickers chore
    chart, and I give myself a star for getting up, taking a
    shower, walking my son to the bus stop, and cooking. I will not
    quit, no matter how tough this gets. It took every ounce of
    strength for me to be here before you today, but I am here
    today because I am a voice for the thousands of people that
    Johnson & Johnson has harmed, and we have a right to be heard.
        I'm so grateful that you've listened to me. I wish that
    Johnson & Johnson would listen too, but they took away that
    right from me and thousands of other people who have their own
    stories, families, and lives that also deserve a right to be
    heard by a jury.
        Thank you again for your time and attention. I'm truly
    grateful.
        [The prepared statement of Ms. Naranjo appears as a
    submission for the record.]
        Chair Whitehouse. Thank you, Ms. Naranjo. We do hear you,
    and we will remember.
        Paul Zumbro is a partner at Cravath, Swaine, & Moore, and
    the head of Cravath's financial restricting and reorganization
    practice. Mr. Zumbro's practice focuses on restructuring
    transactions and related financings, both in and out of court,
    as well as bankruptcy, merger, and acquisition transaction. His
    restructuring experiences includes both debtor and creditor
    side representations and includes work in the field of
    municipal and sovereign debt restructuring as well as
    insolvency-related litigation matters. Mr. Zumbro.

                 STATEMENT OF PAUL H. ZUMBRO, CRAVATH,

                 SWAINE & MOORE LLP, NEW YORK, NEW YORK

        Mr. Zumbro. Good afternoon, Chairman Whitehouse, Ranking
    Member Kennedy, and Subcommittee Members. I'm honored to appear
    before you today to discuss divisional merger bankruptcies,
    known more colloquially and colorfully as the Texas Two-Step.
    I'm testifying today solely as an expert in the field and not
    on behalf of any person or party.
        Texas Two-Step has a lighthearted ring to it, but the
    underlying issues are serious and important, and I commend the
    Committee for examining the topic. My perspective as a
    bankruptcy practitioner is this: divisional merger bankruptcies
    of the type that have been filed are an appropriate use of
    bankruptcy.
        Before discussing the reasons for that conclusion, let me
    first briefly describe what a divisional merger is. Two States
    have enacted divisional merger statutes, Delaware and Texas.
    Unlike a traditional merger, where two entities merge together
    to form a new entity, a divisional merger involves one entity
    dividing into two. In a divisional merger bankruptcy, the
    original company is divided into two parts, one new company
    that attempts to resolve the asbestos-related claims globally
    through a Chapter 11 bankruptcy process and one new company
    that continues to operate the business.
        Here is where a critical misunderstanding may arise. While
    the transaction involves two steps, the separation of entities
    and a bankruptcy filing, it does not involve the side-stepping
    of accountability or financial responsibility for the asbestos-
    related claims. The law should not and would not allow that.
        Going all the way back to the Fraudulent Conveyances Act of
    1571, also known as the ``Statute of 13 Elizabeth'', it has
    been illegal to take actions with the purpose and intent to
    delay, hinder, or defraud creditors. Those same words appear in
    our Federal bankruptcy code and in the laws of all 50 U.S.
    States. Importantly, the Delaware and Texas divisional merger
    statutes do not attempt to override this longstanding body of
    law. Rather, both provide that any division of assets and
    liabilities is subject to existing creditors' rights laws.
        The reason these transactions should not constitute a
    violation of creditors' rights laws is the funding agreement,
    and agreement from the operating company to fund the trust to
    be established under section 524(g) of the bankruptcy code to
    pay the claims. There is a funding agreement in each of the
    divisional merger bankruptcies filed to date. At the core, the
    funding agreement evidences an affirmative acceptance of
    financial responsibility and access to the value of the company
    that existed pre-separation, not a corporate effort to sidestep
    accountability.
        Why split the company before bankruptcy? Because it allows
    the company to use the tools contained in the bankruptcy code,
    such as 524(g) trust, to address mass tort liabilities and
    compensate claimants while preserving as much value as possible
    for all constituents. By separating the company into two,
    productive assets and businesses, which often have operations
    separate from the operations that resulted in the potential
    liabilities, will be able to operate without the overhang of
    bankruptcy which, among other things, affects employee
    retention and relations and relationship with suppliers and
    customers.
        That value inures to the benefit of the claimholders
    through the funding agreement so that the claimholders are no
    worse off, and they may be better off. It also enables the
    company to use the bankruptcy code to address tort liabilities
    in a way that is more streamlined and is fair to the
    claimholders--more fair to the claimholders as a whole than the
    tort system through the use of provisions like the Section
    524(g) of the bankruptcy code.
        Claimant trusts have been an accepted method of addressing
    asbestos claims since at least 1994, when Congress added
    Section 524(g) to the bankruptcy code. They are fair. They can
    only be established if 75 percent of the claimants themselves
    approve it. They are efficient. Bankruptcy provides a single,
    centralized forum to resolve and pay claims. They are
    equitable, unlike the lottery-like results of a pot of gold for
    some claimants and little or nothing to others. That is not
    allowed in bankruptcy.
        Both for these reasons and the strong Federal policy of
    access to bankruptcy, I do not believe the legislation that has
    been proposed to outlaw a bankruptcy filing within 10 years of
    a divisional merger is necessary or appropriate. In my opinion,
    congressional time and effort would be better spent on other
    bankruptcy topics such as establishing uniform standards for
    third-party releases in appropriate cases. Mr. Chairman, I
    thank you again for the opportunity to share my thoughts on
    these very important issues.
        [The prepared statement of Mr. Zumbro appears as a
    submission for the record.]
        Chair Whitehouse. Thank you. Our final witness on the panel
    is Mr. Kevin Maclay. He is the head of the bankruptcy and
    complex litigation practice groups and a member of the board of
    directors at Caplin & Drysdale. Mr. Maclay's practice focuses
    on complex civil and commercial litigation and protecting
    creditors' rights in Chapter 11 bankruptcy cases.
        Mr. Maclay has extensive experience in such
    representations, including serving as co-lead bankruptcy
    counsel in the DBMP and Aldrich Pump divisive merger
    bankruptcies. Mr. Maclay.

                   STATEMENT OF MR. KEVIN C. MACLAY,

                   CAPLIN & DRYSDALE, WASHINGTON, DC

        Mr. Maclay. I would like to thank Chairman Whitehouse,
    Ranking Member Kennedy, and Members of the Subcommittee for
    inviting me to testify here today. My name is Kevin Maclay, and
    I'm here to talk about the Texas Two-Step.
        The Texas Two-Step is, at its core, extremely simple. A
    company splits into two entities. One of those entities gets
    nearly all of the assets and whatever liabilities the company
    decides it wants to keep paying. The second company is a mere
    shell. It gets almost none of the assets but gets whatever
    liabilities the company chooses to stop paying.
        To date, those disfavored liabilities have been those owed
    to tort victims like Ms. Naranjo, sitting one chair over to my
    right and from whom you've just heard. Then, the shell company
    files for bankruptcy protection. This immediately cuts off Ms.
    Naranjo's ability to get paid for her injuries, potentially for
    an extended period of time, while other creditors of the
    original entity continue getting paid in full and on time.
        Indeed, from the perspective of the non-bankrupt company,
    almost nothing has changed, because that entity carries out
    business as usual under the same name as the original company,
    making the same products as the original company, and selling
    to the same customers as the original company. Yet, because of
    its artificial creation of a bankrupt shell company through the
    Texas Two-Step, the non-bankrupt is both immune from suit in
    the tort system and free from the bankruptcy court oversight
    and transparency required of all debtors in the bankruptcy
    system.
        No one should be able to put themselves above the law this
    way, and until 2017, no one had. But then, Georgia-Pacific
    pioneered the Texas Two-Step. As a result, the tort creditors
    consigned to its bankrupt shell company, Bestwall, have been
    stuck in bankruptcy for more than 4 years now without being
    paid a dime while all other creditors have been paid in full.
        Since then, the dominoes have continued to fall as one
    extremely wealthy corporate family after another, all of them
    worth many billions of dollars, have used the Texas Two-Step:
    CertainTeed and Saint-Gobain, Trane Technologies, and now even
    Johnson & Johnson. Johnson & Johnson is worth more than $450
    billion and its credit rating is higher than the U.S.
    Government's.
        Bankruptcy is intended to assist the honest but unfortunate
    debtors seeking to reorganize. When the richest and most
    powerful corporations in the country are using the Federal
    bankruptcy system to avoid paying the most vulnerable people in
    the country, something is wrong. The system needs to be fixed.
    The Texas divisional merger law was never intended to be used
    this way. It explicitly was intended to preserve all rights of
    creditors under existing laws. Out-of-state companies have
    misused that law to pervert the Federal bankruptcy system.
        This is just the beginning. While the Texas Two-Step so far
    has been used to disadvantage tort victims, the very same
    mechanism can and inevitably will be used to permit
    corporations to rid themselves of any unwanted creditors:
    commercial and contract creditors, warranty claim creditors,
    environmental creditors, or others. The Texas Two-Step is a
    free pass for a corporation to disregard its obligations under
    law at will, and I believe that Congress should act now to
    close this loophole.
        You've heard today about the so-called funding agreement.
    Let's talk about funding agreements. First of all, they're
    written by the same people who came up with the Texas Two-Step.
    They're not a protection against the Texas Two-Step; they're
    part of the scheme.
        First of all, they don't prevent the non-bankrupt entities
    from sending their cash, potentially all of their money, to
    other entities. They don't prevent subsequent mergers or
    acquisitions, and most importantly, the non-bankrupt entities
    that control the bankrupt shell companies have the final say in
    whether those bankrupt entities even asked for the funding
    agreement to be complied with in the first place.
        In other words, these are highly contingent and frankly
    illusory agreements which are not a protection against
    anything. We've heard about other existing remedies. Well,
    look, the other existing remedies haven't stopped the Texas
    Two-Step. More and more of the richest companies in our country
    are doing it, and their victims are getting stuck in bankruptcy
    indefinitely, which deprives them of their ability to seek
    justice in this country, which allows all other creditors to be
    paid. It's just not fair.
        We've already heard about in the Bestwall bankruptcy, 4
    years later, they're still stuck in bankruptcy. That's not
    even-handed justice, and frankly, Members of this Subcommittee,
    delay is the point. This mechanism is used to stick disfavored
    creditors into bankruptcy where they're stuck in the hopes that
    someday, they'll knuckle under and agree to just to accept
    pennies on the daughters--pennies on the dollars for the values
    of their claims.
        The existing bankruptcy code has not been sufficient to
    stop this scheme. It's only accelerating. Unless this
    Subcommittee and Congress does something to stop it, I fear
    it's only going to get worse. Thank you.
        [The prepared statement of Mr. Maclay appears as a
    submission for the record.]
        Chair Whitehouse. Thank you very much. Judge Fitzgerald, to
    go to your GoodCo, BadCo example, when the division takes
    place, how does anyone know that all of the injured parties
    have been found yet? How does one know the scope of the total
    injury that has been inflicted?
        Judge Fitzgerald. I don't think that they do know that,
    Senator. What they know is the number of suits that have been
    filed against them and/or complaints that have somehow come to
    their attention, not necessarily formal complaints. In all of
    these cases, there are huge numbers of future demands, which is
    one of the reasons that Congress foresaw the need for Section
    524(g). So, I don't think it's possible to know.
        Chair Whitehouse. What happens to lawful claims for
    punitive damages?
        Judge Fitzgerald. That depends on the particular case. In
    the bankruptcy code, punitive damages are generally
    subordinated to other types of claims. It depends on the State
    law what has happened in many of the mass tort bankruptcy
    cases.
        Chair Whitehouse. What happens if the total injury exceeds
    the trust amount? Does BadCo have a continuing claim against
    assets of GoodCo to fill in any gaps?
        Judge Fitzgerald. That depends, Senator, again, on what the
    relationship between the parties is. In the case of the funding
    agreements, the assertions have been made that that's the case,
    but in fact there are cross indemnities generally speaking such
    that if BadCo pays out money, then GoodCo's supposed to
    reimburse, but if GoodCo pays out money, BadCo's supposed to
    reimburse. The net effect is not necessarily clear, first of
    all. And second----
        Chair Whitehouse. Is GoodCo a party in the bankruptcy
    proceeding?
        Judge Fitzgerald. I'm sorry?
        Chair Whitehouse. Is GoodCo ordinarily a party in the
    bankruptcy proceedings?
        Judge Fitzgerald. No. It's not a party unless it has co-
    liability with the debtor. To that extent, it is essentially a
    party. It's a named party. The problem is that GoodCo usually
    has independent--or the allegations are that GoodCo has
    independent liability, which would not be part of the
    bankruptcy estate.
        Chair Whitehouse. How about evidence? Discovery? Corporate
    documents? Things like that. When somebody's been injured by a
    corporate entity, usually there's a very robust discovery. That
    discovery can continue really until the eve of trial on some
    occasions, and I'm familiar with times when documents have been
    discovered that completely change the complexion of the
    liability. When Ms. Naranjo is sent to BadCo, what rights does
    she have and what rights do her lawyers have to continue
    discovery and document production and so forth against GoodCo?
        Judge Fitzgerald. They still have rights. The problem is
    that the way the operation has worked in bankruptcy is that
    those rights are stayed and generally temporarily if not
    permanently enjoined. Although there may be rights to
    discovery, they're not accessible. The system simply is not
    sufficient in that respect to deal with those issues.
        Chair Whitehouse. So, discovery effectively stops----
        Judge Fitzgerald. Yes.
        Chair Whitehouse [continuing]. At the--when the Texas Two-
    Step begins.
        Judge Fitzgerald. It stops as to GoodCo.
        Chair Whitehouse. Yes.
        Judge Fitzgerald. Yes.
        Chair Whitehouse. There's no reason for GoodCo to turn over
    all of its documents to BadCo, is there?
        Judge Fitzgerald. Certainly not.
        Chair Whitehouse. In fact, that would be counter to the
    purpose of the operation, assuming the purpose of the operation
    is to protect the assets of GoodCo.
        Judge Fitzgerald. That would be my opinion, yes, sir.
        Chair Whitehouse. Mr. Maclay, do you have any response to
    any of those comments that I just made? I've got another minute
    before I turn it over to Senator Kennedy.
        Mr. Maclay. Yes, Mr. Chairman. I think you've made an
    excellent point and suggest an excellent point, which is that
    GoodCo isn't in bankruptcy. It's not supposed to get the
    protections of the bankruptcy, but it gets to enjoy those
    protections. At the same time, like a puppet on a string, it
    controls BadCo, because BadCo has overlapping officers and
    directors with GoodCo and the rest of the corporate family.
    It's really just an illusion, Your Honor, to think of BadCo as
    anything other than an empty shell, as even some of the courts
    applying these bankruptcies have recognized.
        Chair Whitehouse. Makes one think of the old doctrine of
    piercing the corporate veil. Would that apply here?
        Mr. Maclay. You're exactly right, Your Honor, that--not
    Your Honor, excuse me, Mr. Chairman----
        Chair Whitehouse. It's all right.
        Mr. Maclay [continuing]. That--you can tell I'm a lawyer--
    that there are supposedly remedies that will work, but we're
    talking here about time. People don't have 10 years to wait for
    all of this to play out. People are dying now. People need to
    get paid now. Ultimately, this is all about delay. That's the
    whole point. Justice delayed is justice denied, Mr. Chairman.
        Chair Whitehouse. Senator Kennedy.
        Senator Kennedy. Thank you, Mr. Chairman. Ms. Naranjo, did
    I say your name right? I'm sorry for all your troubles.
        Ms. Naranjo. Yes, you did. Thank you.
        Senator Kennedy. I'm sorry for all your troubles.
        Ms. Naranjo. Thank you.
        Senator Kennedy. Mr. Zumbro, tell my old friend Phil
    Gelston I said hi.
        Mr. Zumbro. Yes, sir. I will.
        Senator Kennedy. Very----
        Mr. Zumbro. He had warm regards to send to you as well.
        Senator Kennedy. Fine lawyer. Fine lawyer. Professor Skeel,
    with respect to a divisional merger and then a bankruptcy, does
    the bankruptcy judge--or does the bankruptcy court make a
    distinction between a divisional merger bankruptcy in good
    faith and one in bad faith?
        Professor Skeel. Yes. I think a bankruptcy judge would. I
    think they would look at the BadCo, to use the term that we've
    adopted from Judge Fitzgerald--they'd look at BadCo and they'd
    ask the question, ``Is that an entity that is in bankruptcy for
    a proper bankruptcy purpose?'' If you set up a BadCo that had
    real assets in it, and it had the liabilities as well, you
    might say yes, that's a proper purpose for that--for that
    entity. The judge looks at what went on in the particular
    divisional merger and makes a decision.
        Senator Kennedy. Let me explore that a minute. I've not
    ever practiced in bankruptcy court. When a divisional merger is
    done, and then there's a bankruptcy, and you have two
    companies--I'll use the terms RichCo and PoorCo as opposed to
    Good and Bad. Does the bankruptcy--I assume that counsel for
    the creditors is raising up fresh hell and saying, ``This
    divisional merger was in bad faith, and it was only done to
    avoid liabilities.'' Assume that's one of the allegations. Does
    the bankruptcy judge then hold a hearing and look to PoorCo and
    its present and prior management and say, ``Tell me why you did
    this divisional merger''? If they say, ``To avoid our
    liabilities,'' does the bankruptcy judge then have authority to
    say, ``No. Get out of my courtroom''?
        Professor Skeel. The answer to that would be yes, and I'll
    unpack it just a little bit if I can. You do the divisional
    merger. There's nothing strange about a divisional merger in
    concept. I mean, you can have perfectly appropriate divisional
    mergers, and nobody thinks about it until we end up in
    bankruptcy. If you do a divisional merger and then you put
    BadCo or PoorCo into bankruptcy, and the creditors, the
    victims, challenge the bankruptcy, say it was filed in bad
    faith, then the bankruptcy judge assesses the divisional
    merger, the Texas Two-Step, and determines whether it belongs
    in bankruptcy or not.
        The standards that courts use vary a little bit from court
    to court, but the standard that will apply in Johnson &
    Johnson, for instance, which is the third circuit standard, the
    Court of Appeals for the Third Circuit--what the court will ask
    is, ``Was there a valid bankruptcy purpose?'' That was the
    first question. Then the second question is, ``Was this
    bankruptcy filed simply to gain a tactical advantage in
    litigation?'' If it's not a valid bankruptcy purpose or it was
    solely for a tactical advantage, the court will kick the case
    out. There is a hearing in Johnson & Johnson in its divisional
    merger case next week to address that question.
        Senator Kennedy. Let me ask Mr. Zumbro. It seems to me that
    issue is do we have a prophylactic rule passed by Congress that
    says you can't do a divisional merger and then a bankruptcy, or
    do we rely on the bankruptcy judge to decide when a divisional
    merger is in good faith and bad faith? Bad faith meaning to
    avoid your creditors.
        Mr. Zumbro. Senator, I think that's right. I think the
    bankruptcy courts are in much better position to evaluate those
    issues than Congress. I don't think a law that flatly prohibits
    a bankruptcy filing after a divisional merger is appropriate or
    necessary. I did a divisional merger recently for a media
    company that needed to sell a content library. If that company
    that bought the content library--library needs to seek
    bankruptcy protection in 10 years, why should it be precluded
    from doing so? I think the courts can make these determinations
    on a case-by-case basis.
        Senator Kennedy. I understand. Could I ask, Mr. Chairman,
    for 30 more seconds? Could you weigh in on that, Mr. Maclay?
        Mr. Maclay. Absolutely. First of all, what Mr. Skeel said--
    what Professor Skeel said is not accurate in the fourth
    circuit. In the fourth circuit, where these bankruptcies are
    all originally filed, bad faith is not enough to dismiss the
    bankruptcy. A judge could find it's in completely bad faith,
    it's a scheme, it's a fraud, but yet if the defendant, if the
    debtor, can argue there's a reasonable likelihood of successful
    reorganization, a standard which is almost impossible to meet,
    then the bankruptcy has to stay. So dismissal is not an
    adequate remedy even for bad faith under the law of the fourth
    circuit where they of course file.
        Second, with respect to this prophylactic rule, think about
    the implications of what I've just said. The court's hands are
    bound. They're bound by this governing controlling precedent,
    and it doesn't matter if it's bad faith. That's not enough.
    Judges are, of course, faced with the cases in front of them
    and they do their best faced with the cases in front of them,
    but when there is such a widely used scheme where the
    wealthiest corporations go into bankruptcy to disadvantage some
    of their disfavored creditors, that is a universal problem
    that, I would submit, calls for a universal answer.
        Senator Kennedy. Okay. Thank you all. Mr. Chairman, I have
    been asked by Professor Anthony Casey of the University of
    Chicago Law School and Professor Parikh of the Lewis & Clark
    Law School to offer statements on their behalf into the record.
    I have----
        Chair Whitehouse. Without objection, they will be made part
    of the record.
        [The information appears as a submission for the record.]
        Senator Kennedy. Thank you. I'm sorry to go over, Mr.
    Chair.
        Chair Whitehouse. Not a problem. Senator Hirono.
        Senator Hirono. Thank you. I do not know if these questions
    have been asked, but it seems to me that, especially in the
    fourth circuit, there is a giant, I don't know what, I would
    call it a loophole--Mr. Maclay, you seem to referred to that--
    for plaintiffs to get any kind of redress. This is pretty
    elementary, I suppose, for people who practice in that area,
    but I'm not familiar with bankruptcy practice. If there is this
    kind of divisive restructuring and the assets are in GoodCo and
    the BadCo is the one that files for bankruptcy, I don't
    understand why the plaintiffs--why can't the plaintiffs just
    turn around sue GoodCo? I think this must be a question for our
    first witness. Professor.
        Judge Fitzgerald. Senator, what happens here----
        Senator Hirono. Or Judge Fitzgerald, I'm sorry.
        Judge Fitzgerald. I'm sorry.
        Senator Hirono. Go ahead. It's for you.
        Judge Fitzgerald. What happens, Senator, thank you, is that
    BadCo files bankruptcy and has the benefit of the automatic
    stay, which stops all litigation against the debtor. In some
    courts, including those in the fourth circuit that have been
    looking into these divisional mergers, that automatic stay has
    been extended to parties that are not the debtor. It's extended
    to GoodCo, and it's extended in the third circuit right now to
    Johnson & Johnson.
        At the moment, as to Johnson & Johnson, it's on a temporary
    basis. The court has not ruled yet on a permanent basis.
    Nonetheless, in the other cases, some of which have been
    pending for 4 years, tort victims have not been able to pursue
    their claims against any other company in the corporation chain
    because the courts have extended the automatic stay and/or
    issued injunctions prohibiting that action from going forth.
        Senator Hirono. See, that's the part that I don't
    understand. Why should there be an automatic stay when using
    this kind of a process? Basically, a company can hide its
    assets, but literally in your face. I don't understand why, in
    bankruptcy law, there is this automatic stay and the plaintiffs
    cannot get to the company that actually did the harm, but they
    are insulated. Why is there this automatic stay?
        Judge Fitzgerald. The----
        Senator Hirono. Anybody else can weigh in and----
        Judge Fitzgerald. The stay is sometimes extended to parties
    who are co-liable with the debtor because, for example, they
    may share insurance. If the automatic stay is not extended to a
    party that share insurance with the debtor and all of that
    insurance is depleted for other claims that are directly
    against that other estate but not against the debtor, then the
    debtor's estate is diminished.
        There are reasons why the stay may actually be validly
    employed against other companies. The problem that these
    companies are facing--that the tort victims are facing, is that
    the stay is stopping all action. Johnson & Johnson, for
    example, can go on its merry way without anybody suing it for
    its direct liability that's totally unrelated to its co-
    liability. There are different theories and causes of action
    that can be brought by parties, and the----
        Senator Hirono. Is this stay a result of judicial action,
    or is there some law that says in bankruptcy filing, there will
    be an automatic stay?
        Judge Fitzgerald. No. The stay is extended to parties when
    the debtor files a motion and/or an adversary proceeding and
    asks the court to extend that stay. Except in Johnson &
    Johnson's case, the debtor, LTL Management, notified all of the
    tort cases in which it was involved before it went to court and
    asked the judge to extend the stay that the stay applied to
    JJCI and J&J.
        Senator Hirono. That really sounds like an abuse of process
    to basically stop plaintiffs at the courthouse door. What if we
    consider legislation that will prevent in these kinds of--from
    any kind of a stay that completely insulates GoodCo?
        Judge Fitzgerald. You know, one of my colleagues used to
    say that you don't kill a flea with an atom bomb, and so I
    think the unintended consequences----
        Senator Hirono. Yes.
        Judge Fitzgerald [continuing]. May be something that
    Congress might want to look at because certainly----
        Senator Hirono. Okay. I'm sorry. I understand about
    unintended consequences. Do you have any suggestions? Do any of
    you have suggestions to close some of these--to prevent these
    kinds of, what I would call, abuse? Also, if it's relatively
    easy to engage in these kinds of divisive mergers, what is to
    prevent a company from just creating those kinds of entities at
    the very beginning and just hold BadCo in abeyance until
    there's time when BadCo should file for bankruptcy? Why don't
    all companies engage in these kinds of mergers----
        Professor Skeel. Well----
        Senator Hirono [continuing]. To insulate itself?
        Professor Skeel. Well, if I can----
        Senator Hirono. Yes, please.
        Professor Skeel [continuing]. Say a few words. You don't
    need to, in a way. I mean, you don't need to set this up today
    because, as Johnson & Johnson did, you can do it at last
    minute. I mean, you can do it, and it takes a day to do this,
    so there's no need to do it in advance.
        Senator Hirono. Okay. That's the answer to that question.
    Mr. Chairman, I'm glad you're having this hearing because I'm
    learning something about bankruptcy law. I think we need to do
    something, but we will--I hope that you come up with----
        Chair Whitehouse. We will pursue.
        Senator Hirono. I hope you can come up with something.
        Chair Whitehouse. We will pursue.
        Senator Hirono. Okay. Thank you very much.
        Chair Whitehouse. We are very honored to be joined by the
    Chairman of the Full Judiciary Committee, Senator Durbin of
    Illinois, and I recognize him now.
        Chair Durbin. Thanks, Senator Whitehouse. Twenty-six years
    ago, I walked into this very room to become a brand-new Member
    of the Senate Judiciary Committee. I was appointed to this
    Subcommittee, and the Chair was a man named Chuck Grassley. We
    were doing something that was interesting. We were rewriting
    the bankruptcy code. You may remember that, 26 years ago. It
    turned out I was the resident expert on the bankruptcy code by
    virtue of taking a course in bankruptcy at Georgetown Law
    School and having been appointed a trustee in bankruptcy for a
    gas station in Springfield, Illinois by Judge Basil Coutrakon.
    I had more experience with bankruptcy than anyone on the
    Committee by virtue of these two things. We set about writing
    the code, and Chuck Grassley taught me a lot about bankruptcy.
    He's a pretty smart fellow.
        I've tried to understand it going forward and tried to put
    aside all the wording of bankruptcy, which can be dry as dust,
    to get down to the human side. Ms. Naranjo, you helped us
    understand the human side in a very personal way, and I know it
    took its toll on you emotionally, but thank you for being here.
    It makes a difference.
        I listened to your explanation, Mr. Zumbro, rationalization
    of divisional merger. There was one sentence you used that I
    went back to make sure I caught it. You said, ``Why would a
    company do this?'' You said, ``By separating the company into
    two, productive--it's two assets and businesses will be able to
    operate without the overhang bankruptcy which, among other
    things, affects employees' retention and relations and
    relationships with suppliers and customers.''
        I think it might also be about money. Just going out on a
    limb here. It isn't just a matter of getting along with people.
    There's a lot of money on the table. For instance, LTL
    Management has $2 billion in its settlement fund; that's the
    PoorCo or BadCo, depending on how you want to characterize it.
    Two billion. Huge, right? Not really. In one talc case against
    Johnson & Johnson involving 22 cancer victims, plaintiffs were
    awarded a judgment of more than $2 billion. How would you
    evaluate the legitimacy of Johnson & Johnson's claims that
    their actions would actually benefit the 38,000 plaintiffs like
    Ms. Naranjo who are seeking restitution?
        Mr. Zumbro. Well, sir, I think that the bankruptcy system
    is supposed to be fair and equitable to everybody. As I
    mentioned in my testimony, the pot of gold for that $2 billion
    verdict might mean someone else gets zero in a verdict and gets
    nothing. What the bankruptcy process is meant to do--you can't
    do that. You can't have one person getting $2 billion and one
    person getting nothing in the bankruptcy process because that's
    not permitted. It's fair and equitable to everybody because
    everybody has to get treated the same in bankruptcy.
        Chair Durbin. No, you missed something very critical. The
    GoodCo, if you can call Johnson & Johnson that, is worth $430
    billion. The BadCo, LTL, ends up with $2 billion for 38,000
    claims, and you're saying that is a fair apportionment by
    Johnson & Johnson? Get real. The idea was to project $430
    billion worth of corporate assets by creating a $2 billion
    entity. That, you think, is fair because it's so small, but I
    think most people want----
        Mr. Zumbro. Sir, what I'm saying is I don't even know if I
    could do the math, but whatever $2 billion is times 38,000,
    that's bigger than even Johnson & Johnson could pay, right?
    Johnson & Johnson is a lot more than--and I'm not representing
    Johnson & Johnson, but they're a lot more than just the talc.
    They've done COVID vaccines. They do a lot of other medical
    things that are very valuable.
        Johnson & Johnson is not a monolithic corporate entity.
    It's owned by pension funds; it's owned by regular Americans in
    401(k)'s. This is a more nuanced issue. Yes, it's about saving
    money because the tort system is broken and you can't resolve
    38,000 claims in the tort system. The bankruptcy system----
        Chair Durbin. Mr. Zumbro----
        Mr. Zumbro [continuing]. Allows it to be done more
    efficiently.
        Chair Durbin. Mr. Zumbro, if you're looking for----
        Mr. Zumbro. It's a win-win for both the companies and the
    victims.
        Chair Durbin. Our legal system is supposed to be looking
    for justice, not efficiency. If you think efficiency says a
    $430 billion corporation can walk away from any wrongdoing--I
    don't know when or if they ever discovered asbestos in talc,
    which may have led to the mesothelioma suffered by the
    gentlelady sitting to your right, but at some point, they're
    going to be asked that in court and held responsible for their
    answer. Apparently, they're losing these cases. There could
    have easily been some knowledge, or there should have been some
    knowledge, that they were in fact selling a dangerous product
    which endangered the life of their innocent customers.
        Go to Johnson & Johnson's website and take a look at all
    the pictures of those beautiful babies and all the products
    they sold for those babies. Our family bought some. Bet you
    everybody in the room did too, never thinking for a moment they
    might be dangerous. It turns out it was dangerous, and people
    are suffering injuries. They're trying to dance around the
    bankruptcy system to avoid paying these innocent victims. That
    is not good corporate responsibility. I yield.
        Chair Whitehouse. Senator Blumenthal.
        Senator Blumenthal. Thanks, Chairman. I apologize that I
    was absent for part of the testimony because I had to go vote,
    so forgive me if I'm repeating any of the ground that's
    covered, but I first want to just second what Chairman Durbin
    has just said about the purpose of the whole justice system. It
    is to enable the survivors and victims of harms to have a fair
    day in court and to have fair access to compensation that
    they're entitled to receive. I want to focus on one aspect of
    the bankruptcy system that so deeply troubles me. What we're
    hearing about the use of the Texas Two-Step rule, as it's
    known, to borrow your phrase, Mr. Zumbro, colloquially and
    colorfully, is very, very serious, which is the choice of
    venues.
        I recognize that some districts like the Southern District
    of New York and the Eastern District of Virginia which, until
    recently, saw a lot of venue and judge shopping, have taken
    some steps toward self-correction by requiring random judge
    assignment in bankruptcy cases. Some individual judges have
    stepped up as well, like Judge Whitley, who transferred the
    Johnson & Johnson bankruptcy from North Carolina to New Jersey,
    where Johnson & Johnson is actually headquartered, but we've
    seen companies move their headquarters to take advantage of
    supposedly favorable forums and judges. There's a whole cottage
    industry that is favorable to one side or another side. A lot
    of the parties are not only skeptical, they are utterly cynical
    about how this system works, non-lawyers as well as lawyers.
        I've been very proud to work with Chairman Durbin and
    Senator Warren on our Nondebtor Release Prohibition Act to
    close some of the loopholes that enable these kinds of judge-
    shopping problems. I'd like to ask all of you, aren't you
    troubled by it, and what should we do about it?
        Mr. Maclay. Thank you, Senator. Kevin Maclay. I think,
    really, the venue issue is part of the broader problem that
    we're here talking about today, which is corporations planning
    out how to disadvantage their victims, essentially, their
    creditors, and the fact that they have filed in the fourth
    circuit and in the Western District of North Carolina. Only
    they could tell you for sure their subjective reasons for doing
    so, but of course the effective of it is that bad faith
    bankruptcy filings can stay around and be used to disadvantage
    their victims.
        It's just one example, Senator, of a facet of the problem
    that hopefully Congress will be able to fix because it's a very
    real problem. I don't know--one of the questions was asked
    earlier, why doesn't everyone do this? Given the way the law is
    currently being applied, I don't know why everyone doesn't do
    it. You get to stick all your liabilities into bankruptcy and
    keep all your operating companies out. Not even the
    inconvenience associated with the bankruptcy. It's really a
    major, major problem. It's a loophole that could swallow the
    entire bankruptcy code. I view it as a problem that needs an
    urgent and immediate solution.
        Senator Blumenthal. No matter how good the rule--and I'm
    probably one of the few United States Senators, at least in
    office today, who has actually tried a bankruptcy case, which I
    did as State Attorney General. I tried a bunch of cases, as did
    some of my colleagues. I'm no bankruptcy expert, and that's my
    point, that the bankruptcy system is a set of seemingly
    abstruse, arcane rules. It has a separate set of practitioners
    and a separate judicial system.
        If you're Purdue Pharma and you go to White Plains, you got
    a judge that, and I'm not drawing any conclusions here, but
    according to the plaintiffs in separate actions, the State
    attorneys general, and some of the victims and survivors, was
    very favorably inclined toward Purdue Pharma and the Sacklers.
    Likewise, that pattern repeated. I guess I'm honing down on
    reforming the rules, but making sure the rules are applied
    evenhandedly and fairly. Mr. Zumbro.
        Mr. Zumbro. Senator, first, thank you for the question. I
    do think I would respectfully disagree on the Nondebtor
    Prohibition Act. I think a blanket prohibition is not the right
    way to do it, but I would encourage Congress to consider
    adopting uniform--more uniform standards for when it is
    appropriate because that issue, like the issue we discussed
    today, I think, is more nuanced and less black and white than
    it may seem because I think there can be appropriate
    circumstances where the victims can actually recover more than
    they would've otherwise recovered as a result of that.
        I do understand your concerns about venue. I think having
    the notion that third-party releases are illegal in California,
    they're illegal in Texas, but they're permitted in Delaware,
    maybe they're permitted in New York--I think they should be--is
    probably not the right way because our Constitution requires
    Congress to enact uniform laws on the subject of bankruptcy. I
    would encourage the Congress consider uniform standards for
    that, but as I've recently written on behalf of the New York
    City Bar Association--we've written a letter to you and your
    colleagues explaining the reasons why we don't think an
    absolute prohibition is the right way to go, but rather more
    standards that are uniformly applied across the judicial
    circuits.
        Senator Blumenthal. Anyone else? Ms. Naranjo, or----
        Ms. Naranjo. Yes. Thank you so much, Senator. What I would
    like to see is, I would like to have my and other 38,000
    victims that are known as of right now--just mesothelioma takes
    about 30 to 50 years to even show up. There's going to be more
    victims. I want to have my constitutional right to be heard by
    the people who harmed me, who harmed my children, who harmed my
    family. I just want to be heard. That right was taken away from
    me.
        Senator Blumenthal. Thank you for being here today.
        Ms. Naranjo. Thank you for listening.
        Senator Blumenthal. Professor.
        Professor Skeel. I would just say that I do think there's
    some venue issues. I think the important thing is to address
    the problems and not pass anything that fixes things that
    aren't problems or changes things that aren't problems. In my
    view, the two big problems we have now--one is judge shopping,
    which you alluded to, in White Plains, and Houston, Texas, and
    the Eastern District of Virginia. That seems to be in the
    process of being solved, at least in the short run, but parties
    should not be able to pick judges within a district, so that's
    a problem.
        The other problem, in my view, is the affiliate part of the
    venue provision, which says any--any--if a connected entity, an
    affiliate entity has filed in a courthouse, you can bring the
    rest of the entity in, even if it's some tiny little entity
    that just got formed for the purposes of the bankruptcy filing.
    That's a problem, in my view. A venue reform that addressed
    that, I think, could help.
        What I don't think would help would be to take away the
    domicile venue option, which is the Delaware venue option. I do
    think that firms ought to be able to file in their State of
    incorporation. In my view, it's very important to solve the
    problems and not create problems by taking away options that
    really aren't the problem. The real problem, in my view, is
    judge shopping and that affiliate hook, which people have used
    to do outrageous things.
        Senator Blumenthal. Part of the problem is, as Mr. Zumbro
    observed, that these rules can differ from one State, one
    district to another.
        Mr. Zumbro. Exactly. Bankruptcy lawyers will tell you quite
    candidly that they have a conversation about that when they're
    about to file a bankruptcy case. They feel like it would be
    malpractice not to consider the fact that the third-party
    release--nondebtor release law is very different in New York
    than it is in Delaware than it is in Chicago or Texas.
        Senator Blumenthal. A good argument for maybe a nondebtor
    release national rule, which I proposed in the SACKLER Act.
        Mr. Zumbro. Possibly, although I am of the view that it's
    important that it be nuanced. That it--I think it would be a
    mistake to completely outlaw third-party releases, but cracking
    down on them I think makes sense. There is an argument for just
    getting rid of them, you know? The basic argument is if you
    don't file for bankruptcy, you don't get the benefits of
    bankruptcy, you know? What third-party releases are doing is
    giving the benefits of bankruptcy to folks who don't file.
        Senator Blumenthal. Right.
        Mr. Zumbro. There's a counterargument, which is in some
    cases, bringing it into the bankruptcy context is better for
    everybody, but that's not always true.
        Senator Blumenthal. Judge Fitzgerald----
        Chair Whitehouse. I'm going to take the Chairman's
    prerogative here. I would like to ask Ms. Naranjo for a last
    word here because one term that has come up repeatedly in this
    hearing has been time, and there is no better witness on this
    panel as to the matter of time than you.
        In addition to what time you have remaining, you also have
    decisions to make with regard to what you can leave to and how
    you can provide for your children, and presumably without
    knowing what is going to emerge from this black hole of a
    bankruptcy that you are stuck in. Those decisions are hard to
    make, and time is short for you to make those decisions. If you
    could close us out with a few words about time?
        Ms. Naranjo. Yes. Time is something that I think folks take
    for granted. We sometimes feel, you know, we have time; we can
    get to that; this will happen. Something that I've heard said
    today was, you know, to make it fair and even. No bankruptcies
    can do that. I won't be here. My kids will probably be 18 by
    then because it takes a long time.
        I'm scared for my family. Like I said in my testimony, my
    daughter's only 28. She's a single mom. She doesn't own a home.
    She's a hairdresser. She's going to raise my children. I don't
    have a pension. I don't have a 401(k). I started late in life,
    but when I started, I took off running.
        I would like more time. I don't have time. Thirty-eight
    thousand other people need more time, but we don't know how
    much time we have in life. It needs to be heard. It needs to be
    heard now, not later. I'm scared. I don't what's going to
    happen, but I am so excited to be here today.
        Chair Whitehouse. Would you do me one favor? Would you tell
    your daughter, Monaliza, that my chief of staff is also named
    Monalisa?
        Ms. Naranjo. I heard that. Such a rare name. Such a rare
    name. I'm so happy to be here. My family's so happy that I was
    invited here. I'm so grateful that I got to be heard.
        Chair Whitehouse. We're delighted to have you here. The
    record of the hearing will stay open for 1 week so any further
    comments can be included. I don't believe we had any questions
    for the record, but if there were any, please answer within the
    week.
        We will undertake to try to figure out something fair here.
    It does not make sense for a $450 billion corporation with
    38,000 people with potentially lethal injuries to be able to
    carve off $2 billion--I did the math, Mr. Zumbro; it's about
    $52,000 per person--and walk away from the responsibility for
    what it did.
        With respect to the questions of fairness and efficiency,
    there's a larger scope for fairness here in which it looks like
    big companies are getting away with dodging real
    responsibilities by using complicated trickery that ordinary
    people don't have access to with the result that they create
    delays that cause people like Ms. Naranjo to get actually no
    recovery in her lifetime. That's neither efficient nor fair. I
    hope we can find a sensible way to solve this.
        Thank you all for your testimony. It has been very helpful.
        [Whereupon, at 4:25 p.m., the hearing was adjourned.]
        [Additional material submitted for the record follows.]

                                A P P E N D I X

    Miscellaneous submissions:

     Commercial Law League of America (CLLA)..........................   103

     Erickson, Jr., John C............................................   133

     Erwin Chemerinskey Amici Curiae Brief............................   108

     Exhibit A........................................................   140

     LTL Management, LLC..............................................   136

     Reuters, "Special Report: Inside J&J's secret plan to cap
        litigation payouts to cancer victims..........................   167

     Tassone, John A..................................................   135

     Wall Street Journal, "Profitable Companies Enlist Bankruptcy
        Courts to Sidestep Cancer Trials..............................   159

     Commercial Law League of America, Appendix in support of
      supplement to record

      https://www.govinfo.gov/content/pkg/CHRG-117shrg56422/pdf/CHRG-
        117shrg
        56422-add1.pdf
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

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