    [Senate Hearing 118-155]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 118-155

                       EVADING ACCOUNTABILITY: CORPORATE
                     MANIPULATION OF CHAPTER 11 BANKRUPTCY

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

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                        ONE HUNDRED EIGHTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 19, 2023

                                   __________

                              Serial No. J-118-32

                                   __________

             Printed for the use of the Committee on the Judiciary

                  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                                     ------

                       U.S. GOVERNMENT PUBLISHING OFFICE

    53-880                     WASHINGTON : 2025

                           COMMITTEE ON THE JUDICIARY

                       RICHARD J. DURBIN, Illinois, Chair

    DIANNE FEINSTEIN, California         LINDSEY O. GRAHAM, South Carolina,
    SHELDON WHITEHOUSE, Rhode Island       Ranking Member
    AMY KLOBUCHAR, Minnesota             CHARLES E. GRASSLEY, Iowa
    CHRISTOPHER A. COONS, Delaware       JOHN CORNYN, Texas
    RICHARD BLUMENTHAL, Connecticut      MICHAEL S. LEE, Utah
    MAZIE K. HIRONO, Hawaii              TED CRUZ, Texas
    CORY A. BOOKER, New Jersey           JOSH HAWLEY, Missouri
    ALEX PADILLA, California             TOM COTTON, Arkansas
    JON OSSOFF, Georgia                  JOHN KENNEDY, Louisiana
    PETER WELCH, Vermont                 THOM TILLIS, North Carolina
                                         MARSHA BLACKBURN, Tennessee

                 Joseph Zogby, Chief Counsel and Staff Director
          Katherine Nikas, Republican Chief Counsel and Staff Director

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page

    Durbin, Hon. Richard J...........................................     1
    Graham, Hon. Lindsey O...........................................     3
    Whitehouse, Hon. Sheldon.........................................     3

                                   WITNESSES

    Haas, Erik.......................................................     6
        Prepared statement...........................................    38
        Responses to written questions...............................    45

    Hessler, Stephen E...............................................     9
        Prepared statement...........................................    47
        Responses to written questions...............................    67

    Jacoby, Melissa B................................................     7
        Prepared statement...........................................    69

    Knapp, Lori......................................................    12
        Prepared statement...........................................    84

    Parikh, Samir D..................................................    10
        Prepared statement...........................................    87
        Responses to written questions...............................   107

                                    APPENDIX

    Items submitted for the record...................................    37

                       EVADING ACCOUNTABILITY: CORPORATE
                          MANIPULATION OF CHAPTER 11
                                  BANKRUPTCY

                                  ----------

                          TUESDAY, SEPTEMBER 19, 2023

                                  United States Senate,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Committee met, pursuant to notice at 10:03 a.m., in
    Room 226, Dirksen Senate Office Building, Hon. Richard Durbin,
    Chair of the Committee, presiding.
        Present: Senators Durbin [presiding], Whitehouse,
    Klobuchar, Coons, Blumenthal, Hirono, Booker, Padilla, Ossoff,
    Welch, Graham, Grassley, Cornyn, Hawley, and Kennedy.

              OPENING STATEMENT OF HON. RICHARD J. DURBIN,
               A U.S. SENATOR FROM THE STATE OF ILLINOIS

        Chair Durbin. This meeting of the Senate Judiciary
    Committee will come to order. Our hearing today is entitled,
    ``Evading Accountability: Corporate Manipulation of Chapter 11
    Bankruptcy.''
        In October of 2021, Johnson & Johnson faced lawsuits from
    nearly 40,000 Americans who had been diagnosed with ovarian
    cancer or mesothelioma, allegedly caused by the company's
    talcum-based pow--talc-based products.
        Rather than defend against these claims in district court
    or settle with victims, Johnson & Johnson used a legal maneuver
    known as the ``Texas Two-Step'' in an attempt to skirt and
    limit accountability and liability.
        Under this bankruptcy maneuver, J&J transferred its legal
    liabilities to a shell company called LTL Management. Johnson &
    Johnson then moved that shell company to a friendly
    jurisdiction, put it into bankruptcy, and asked the court to
    stay all litigation against the still-solvent and highly
    profitable parent company, Johnson & Johnson.
        Johnson & Johnson is not the only wealthy corporation to
    use the bankruptcy system to try to limit exposure and evade
    accountability. We now turn to a video to detail some of these
    abuses.
        [Video is presented.]
        Chair Durbin. Ms. Naranjo was a witness at our earlier
    hearing and sadly has passed away.
        I don't come to this hearing as an expert in bankruptcy. My
    exposure to the subject is a law school course, and the fact
    that in my regular practice of law in the city of Springfield,
    Illinois, I was named a trustee in bankruptcy for a gas
    station. So I do not--I've never played at the highest levels,
    but I think what we're addressing here is certainly the
    jurisdiction of this Committee, and timely, and appropriate for
    this hearing.
        We acknowledge corporate bankruptcy plays an important role
    in our economy. It is meant to allow a company in financial
    distress to go before a bankruptcy court, agree to certain
    conditions, and, in exchange, get protection.
        This provides space for the company to negotiate with its
    creditors to reach a compromise on how the company's debts will
    be addressed. All under the watchful eye of the bankruptcy
    court.
        If all goes well, the debtor is given a fresh start, an
    opportunity to move on without the burden of unmanageable debt.
    That's the fundamental principle at the root of the bankruptcy
    system. The idea that financial calamity shouldn't be a death
    nail for every business. That innovation and risk can be good,
    and that the law should provide for second chances.
        But if a company is going to be freed from its debts, there
    has to be some cost. The company has to accept oversight of the
    bankruptcy court. It has to compensate its creditors according
    to their interest. 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.
        The video featured testimony from Kimberly Naranjo, a
    mesothelioma victim who testified last year, and as I
    mentioned, has since passed away. We are joined today by
    another mesothelioma victim, Justin Bergeron, a young father
    still fighting to hold Johnson & Johnson accountable.
        While Johnson & Johnson's potential liability to Ms.
    Naranjo, Mr. Bergeron, and thousands of other Americans is
    substantial, it isn't something this company can't handle. At
    the time it executed the Texas Two-Step, Johnson & Johnson was
    valued at more than $420 billion.
        That year, it made nearly $64 billion in profit. When the
    court rejected their attempt to use this maneuver as a ``bad
    faith'' scheme, Johnson & Johnson sent its shell company, LTL
    Management, back into bankruptcy a mere 2 hours later.
    Unbelievable.
        We've seen a similar playbook used by 3M to try to avoid
    accountability for allegedly selling defective combat earplugs
    to our troops for more than 200,000 servicemembers.
        We'll hear from Lori Knapp whose father tragically died of
    mesothelioma, allegedly caused by products manufactured by
    Georgia-Pacific, another corporation. She still hasn't been
    able to hold the company accountable due to this bankruptcy
    scheme.
        These maneuvers are blatant attempts by wealthy
    corporations to bypass our tort system, to simply decline to be
    held liable. And we have every reason to expect that
    corporations, at least those with deep enough pockets, will
    continue to try to manipulate bankruptcy in similar ways.
        That's not what the Congress intended when it created
    bankruptcy. It's not something we should allow to continue.
    With that, I'll turn to Ranking Member Graham for his opening
    statement.

              OPENING STATEMENT OF HON. LINDSEY O. GRAHAM,
            A U.S. SENATOR FROM THE STATE OF SOUTH CAROLINA

        Senator Graham. Thank you, Mr. Chairman. I look forward to
    hearing from the witnesses.
        I'm not an expert in bankruptcy either, but the whole goal
    is to have a global settlement.
        In the case of Johnson & Johnson, I think millions of
    dollars were offered and under bankruptcy law, fraudulent
    transfers are prohibited and you have a litigation model to
    make these claims. So we'll sit here and listen to see if that
    litigation model the powers of judges needs to be changed by
    statute.
        But the goal of bankruptcy is to take a company, try the
    best you can to make claimants whole, but allow a
    reorganization so people can move forward rather than just--
    multi-district litigation seems not to work. So I understand
    the purpose of bankruptcy. I understand the litigation model as
    claimants can set aside mergers. They think they're fraudulent
    in the eyes of the court. So we will deal with that.
        But one thing we're not dealing with is a broken border. I
    don't know if you saw yesterday, there's 2,000 people on a
    train coming out of Mexico, cheering and yelling because
    they're coming to our southern border.
        Eventually, sometime, somewhere, I hope the Democratic
    majority will take a little bit of time--and everything's
    important, but I can't think of anything more important than to
    stop what I think is literally an invasion of the country.
        People are being released by the thousands because there's
    no space left. And we've got to deal with this. We've got to--
    we've got to, as a Senate, come up with a solution. The House
    passed a border security plan. You may not like it, but at
    least they did it. It's time for us, Mr. Chairman, to take this
    problem seriously because it is a life and death situation on
    multiple levels.
        Chair Durbin. Senator Graham, I share your concern about
    this challenge, and, as you know, we're scheduled to sit down
    tomorrow for the opening conversation about this. I hope it
    leads to a bipartisan response, which we've seen in the past
    and need to have again.
        This issue of bankruptcy is shared not only with the full
    Committee, but certainly the Subcommittee on Federal Courts,
    which has jurisdiction over the Bankruptcy Code.
        I'm going to recognize Senator Sheldon Whitehouse, Chair of
    that Subcommittee, for an opening statement.

                 STATEMENT OF HON. SHELDON WHITEHOUSE,
             A U.S. SENATOR FROM THE STATE OF RHODE ISLAND

        Senator Whitehouse. Thank you, Chair Durbin and Ranking
    Member Graham, for holding this hearing on this important
    topic. Last February, Senator Kennedy and I held a hearing,
    with the Chairman's support, in my Federal Courts Subcommittee
    to highlight a way that corporations have been abusing the
    bankruptcy system.
        That was the then-emerging maneuver known as the Texas Two-
    Step. This ploy allows large corporations on solid financial
    footing, like Johnson & Johnson and Georgia-Pacific, well-known
    names, to shirk responsibility for damage their products have
    caused, and delay paying due compensation for Americans they
    have hurt.
        During that hearing, I outlined four main reasons the Texas
    Two-Step is a problem.
        First, it violates the fundamental bankruptcy principle
    that a company must open up all of its assets and liabilities
    to creditors in exchange for being forgiven its debts and
    allowed to start anew.
        Second, it denies individuals their day in court, and
    denies victims a jury of their peers.
        Third, it encourages forum shopping by corporations to take
    advantage of more favorable locations.
        Fourth, the Texas Two-Step enmires victims in protracted
    bankruptcy proceedings, robbing them of precious time.
        Proponents of the Texas Two-Step argue that this maneuver
    is better for victims than resolving claims through the tort
    system because it supposedly delivers compensation faster and
    more equitably than litigation.
        But look at the facts. The earliest Texas Two-Step
    bankruptcy, which started in 2017 with Georgia-Pacific, is
    still unsolved--unresolved after 6 years.
        As for equity and fairness, take the fact that when Johnson
    & Johnson attempted to use the Texas Two-Step to resolve tens
    of thousands of claims against it for cancer caused by its talc
    products, the company's initial proposal of a $2 billion
    settlement fund and its subsequent $8.9 billion settlement
    offer were both dismissed by courts after they determined that
    there was no justification for Johnson & Johnson's subsidiary
    to declare bankruptcy in the first place, given Johnson &
    Johnson's financial strength.
        Put all this together, and it sure looks like a dirty trick
    where a company flushed with cash tries to put its assets out
    of reach, and then bogs down tort claimants in bankruptcy
    proceedings to drag out for years with only a thin funding
    agreement as a promise to pay out compensation.
        In that hearing last February, we heard from Kimberly
    Naranjo, whose testimony just appeared in the Chairman's video.
    She was diagnosed with terminal mesothelioma after using
    Johnson & Johnson baby powder. She sued Johnson & Johnson, and
    her claim was halted along with 38,000 others once Johnson &
    Johnson undertook the Texas Two-Step and put its talc
    liabilities into bankruptcy proceedings.
        During Kimberly's brave and moving testimony, she told us
    how when she learned that she could file a lawsuit and have it
    decided by a jury, she saw a path forward for her family. She
    believed that justice would be done, and that her loved ones
    would be taken care of even after she was gone. She was filled
    with hope. That hope was taken from her when Johnson & Johnson
    used the Texas Two-Step to avoid giving Ms. Naranjo, and
    others, their day in court.
        In her concluding remarks that day, she spoke powerfully
    about how time is something we too often take for granted. She
    was scared for her family and the prospect that after she
    passed nothing would come to resolution for years. Ms. Naranjo
    died in January of this year.
        People are dying while corporations try out this bankruptcy
    trick to see if they can make it stick. I continue to hope that
    we can work in a bipartisan fashion to address this abuse of
    our bankruptcy process, and to make sure that injured victims
    get the day in court that our Constitution entitles them to.
    Thank you, Chairman.
        Chair Durbin. Thank you, Senator Whitehouse. Senator
    Kennedy is Ranking Member of the Subcommittee. Do you wish to
    make a statement?
        Senator Kennedy. [Voice is off microphone.]
        Chair Durbin. Thank you very much.
        Today, we welcome five witnesses. I'll introduce the
    Majority witnesses, then turn to Ranking Member Graham to
    introduce the Minority witnesses.
        Our first witness is Erik Haas, worldwide vice president of
    litigation at Johnson & Johnson, a position he's held since
    2020. Previously, a partner at Patterson Belknap Webb & Tyler.
        We're also joined by Professor Melissa Jacoby, the Graham
    Kenan Professor of Law in the University of North Carolina at
    Chapel Hill School of Law. Professor Jacoby has written
    extensively on bankruptcy and is an expert on the issue.
        Our final witness is Lori Knapp. Ms. Knapp's father, Ed
    Chapman, passed away from mesothelioma, a result of asbestos
    poisoning. Ed was prevented from pursuing his claim against
    Georgia-Pacific due to the company's use of this same Texas
    Two-Step maneuver.
        Ms. Knapp is here today to help us understand how this
    maneuver has a direct, real-life impact on American families.
    Ranking Member Graham, would you like to introduce your
    witnesses?
        Senator Graham. Yes, Mr. Chairman.
        Mr. Stephen Hessler is a partner at Sidley Austin in New
    York City, leads the firm's global restructuring group. He has
    more than two decades of experience representing debtors,
    creditors, and investors in large and complex Chapter 11 cases,
    restructuring, acquisitions, and related litigation. He
    received his B.A. from the University of Michigan, has a J.D.
    from the University of Michigan Law School.
        Mr. Samir Parikh--that pretty close?
        Professor Parikh. Yes.
        Senator Graham. Good. Is the Robert E. Jones Professor of
    Advocacy and Ethics at Lewis & Clark Law School in Portland,
    Oregon. His research and writing focuses on a variety of
    business law and bankruptcy issues, including mass tort
    restructuring, fraudulent transfer law, and forum shopping. He
    received his B.A. from the University of Miami and his J.D.
    from the University of Michigan Law School.
        Chair Durbin. Thank you, Senator Graham. I'd ask the
    witnesses to please stand for the administration of the oath.
    If you'll raise your right hand.
        [Witnesses are sworn in.]
        Let the record reflect that all the witnesses have answered
    in the affirmative. And Mr. Haas, you'll be the first to
    testify. You have 5 minutes, and then after all the panel has
    testified, Members will each have 5 minutes for questions.
    Please proceed.

     STATEMENT OF ERIK HAAS, WORLDWIDE VICE PRESIDENT, LITIGATION,
                  JOHNSON & JOHNSON, ARMONK, NEW YORK

        Mr. Haas. Thank you, sir. Chairman Durbin, Ranking Member
    Graham, and the Members of the Committee, thank you for the
    opportunity to participate in today's hearing.
        Mr. Chairman, you asked that we speak today to LTL's recent
    bankruptcy filings, which were brought to effectuate an
    equitable and efficient resolution of mass tort litigation that
    had forced J&J's stand-alone consumer product subsidiary into a
    loss position in 2020.
        LTL's proposed bankruptcy resolution contemplated the
    payment of an unprecedented $8.9 billion to resolve all claims
    alleging that the subsidiary's talc powder products caused
    cancer. That unprecedented offer, understandably, was supported
    by the court-appointed mediators and counsel representing the
    vast majority of the talc claimants, who described it as a
    significant victory that would provide expeditious,
    substantial, and fair compensation.
        The offer also was supported by Johnson & Johnson, which
    agreed to provide financial backing for LTL's proposed
    bankruptcy resolution that, as the Third Circuit recognized,
    the company had no obligation to provide.
        Thus, far from evading accountability as suggested by the
    title of this hearing, the proposed resolution would've
    afforded all talc claimants compensation in a timely manner, a
    result that is not possible in the tort system for at least
    three important reasons.
        First, J&J and its subsidiary have won the overwhelming
    majority of cases tried in court. The company has prevailed
    because the talc claims that are contrived by the plaintiff
    bars are utterly meritless.
        Those claims have been refuted by decades of research by
    medical experts around the world that support the safety of
    consumer talc, as well as the findings by the FDA, and other
    health agencies, that cosmetic talc does not cause cancer.
    Because the science is clear, most claimants have received and
    will receive absolutely nothing from litigating in the torts
    system.
        And second, regardless of the merits, trying the tens of
    thousands of existing cases would take thousands of years. This
    means that most claimants will never ever have their day in
    court.
        Third, only bankruptcy provides the tools that allow both
    current and future claimants the ability to participate in and
    receive compensation from the resolution progress--process.
        Congress legislated those tools into Section 524(g) of the
    Code, which provides that asbestos mass torts like ours are
    properly addressed by a bankruptcy trust covering current and
    future claims.
        So, with the support of counsel representing the vast
    majority of claimants, there was a strong likelihood of
    securing the requisite vote in favor of LTL's bankruptcy plan.
        Indeed, our goal going into bankruptcy was simply to let
    the claimants to decide for themselves, with a vote on the
    proposed plan, whether it was in their own best interest.
        Unfortunately, the claimants never had that opportunity be
    to be heard because the case was transferred to the Third
    Circuit, which adopted a novel standard that required the
    bankruptcy court to dismiss.
        The Third Circuit adopted that novel standard at the urging
    of mass tort lawyers representing a small minority of
    claimants, mostly mesothelioma lawyers, whose business model is
    predicated on the possibility of winning one-off jackpot
    verdicts from which they will take up to a 40 percent fee. This
    mass tort litigation business model is not in the best interest
    of claimants, should not be dictating bankruptcy policy, and is
    a scourge facing U.S. companies today.
        Although compelled to dismiss the case, the bankruptcy
    court also stated that LTL had made remarkable progress toward
    a fair, efficient, and expeditious settlement. And the court
    strongly encouraged LTL to continue to pursue a global
    resolution through bankruptcy. We intend to follow the
    bankruptcy court's directive to achieve a resolution that is in
    the best interest of and is supported by the claimants.
        In the end, the claimant's vote should be what matters. We
    urge this Committee to support legislation to clarify that the
    proposed resolution, like ours, should get to a vote. Let the
    people vote.
        [The prepared statement of Mr. Haas appears as a submission
    for the record.]
        Chair Durbin. Thank you, Mr. Haas. Professor Jacoby.

    STATEMENT OF MELISSA B. JACOBY, GRAHAM KENAN PROFESSOR OF LAW,
    UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL, CHAPEL HILL, NORTH
                                CAROLINA

        Professor Jacoby. [Voice is off microphone.]
        Chair Durbin. Make sure your microphone is turned on. There
    we go.
        Professor Jacoby. Thank you.
        When I first learned about bankruptcy, and its impact on
    laws and procedures all over the country, and indeed the world,
    it felt like a new set of power tools. And like the power tools
    one might have in a workshop, there's a temptation to use them
    broadly and, say, try to use them to fix problems, never mind
    what the instruction manual is telling us about the warnings of
    doing so.
        So I'd like to draw a broader frame around what's happening
    in Chapter 11. The understandable role that some of these
    extraordinary interventions that bankruptcy offers plays, and
    why they are a difficult fit for, really, all mass tort cases,
    but need special care in certain situations so that they're not
    misused.
        So these power tools--and we'll talk about the automatic
    stay, to use the jargon. We can talk about the discharge. We
    can talk about the majority getting to bind dissenters and
    change their rights forever.
         These rules work fairly smoothly in the vast majority of
    big Chapter 11 commercial cases. We're talking about bond
    holders, and lenders, and other investors. Debts as we
    typically understand them.
        That's why it makes sense to impose an immediate
    injunction, which is a very big deal for a Federal court to do.
    But Congress says it's automatic in the bankruptcy situation,
    typically to stop debt collection. It's a different story to
    talk about stopping jury trials to determine liability about
    wrongdoing in the first place.
        And then we get to the permanent alteration of legal
    obligations.
        Big companies already get broader, permanent legal relief
    than financially distressed consumers do, and it is a very
    significant fact that you don't need unanimous consent. You
    can't bind dissenters with the majority--that overrides a lot
    of other law.
        And it's one thing to do that in cases involving robust
    debates over interest rates and other terms. It's completely
    different in a series of cases that are about managing
    lawsuits, creating an alternative justice system not to
    negotiate with banks and hedge funds and the like.
        So they're overriding not just normal debt collection,
    they're overriding how ordinary law determines liability for
    wrongdoing in the first place. So guardrails are really
    essential here.
        Now, there are a lot of cases we could talk about, but Mr.
    Haas is here in talking about J&J. So I'll turn there. I think
    that Mr. Haas and I agree on some meaningful things. We agree
    that bankruptcy has very unique features. Those power tools
    cannot be found elsewhere.
        And it's understandable why even profitable corporations
    would want to use them and argue that they're efficient. I
    think we aspire for fair outcomes for all. I agree that all
    people need ethical representation and deserve it from their
    lawyers, whether they are an injured person or a big
    corporation.
        And I think that the bankruptcy system should be used for
    its intended purpose as, I think, Mr. Haas was suggesting. But
    we have very different conceptions of what that means.
        So Congress did not create bankruptcy to be the complaint
    department about plaintiffs' lawyers in the civil justice
    system, or a forum to hash out the science when it hasn't
    gone--when the other courts have not always seen J&J's position
    on this. And we can talk about the MDL, and the FDA, and other
    things, if people would like.
        Congress did not intend lawsuits to be stripped into a
    separate subsidiary. I think this history of 524(g) for
    asbestos really--imagine the entire operating company being in
    the bankruptcy. That was the design of Johns Manville. That's
    how it was created.
        And the Third Circuit decision is fully in the mainstream
    of the bankruptcy system and fully consistent, I think, with
    what Congress had in mind.
        The Fourth Circuit standard by contract is not particularly
    well respected.
        Now, I understand that J&J has the right to suggest it
    knows bestc, what for all the claimants.
        In my remaining time, I just want to highlight that J&J has
    an incentive to find whatever number of claimants, however
    vetted or not vetted they are, and consider them the majority.
    It's very hard to get a handle on the entire universe.
        At the very least, mesothelioma and ovarian cancer
    claimants deserve a different voice. They are in different
    situations, and within them have different experiences. So,
    thank you.
        [The prepared statement of Professor Jacoby appears as a
    submission for the record.]
        Chair Durbin. Thank you, Professor Jacoby. Mr. Hessler.

               STATEMENT OF STEPHEN E. HESSLER, PARTNER,
                 SIDLEY AUSTIN LLP, NEW YORK, NEW YORK

        Mr. Hessler. Chairman Durbin, Ranking Member Graham,
    Members of the Committee, thank you for inviting me to testify.
    The title of today's hearing indicates meaningful criticism,
    or, at least, a skepticism of certain facets of present
    bankruptcy practice. I believe much of that narrative, even
    though well intended, rests on an incomplete understanding of
    the text design and the application of the Bankruptcy Code.
        That said, I do also believe the Committee's emphasis on
    accountability today is entirely appropriate.
        As with any detailed body of law, Chapter 11, of course,
    always may benefit from continual reform. I will not repeat my
    written testimony in these opening remarks, though I do want to
    summarize briefly two key themes. How both Congress in drafting
    Chapter 11 and bankruptcy court judges in applying Chapter 11,
    how they do enforce accountability by corporate debtors.
        First, the Bankruptcy Code and Bankruptcy Rules are replete
    with provisions through which Congress thoroughly requires
    Chapter 11 debtors to justify their decisions and actions--all
    subject to bankruptcy court approval, and all subject to a vast
    array of powerful rights granted to stakeholders to protect and
    pursue their claims against corporate debtors. My testimony has
    set forth in detail more than a dozen Code mechanisms that
    embody the following principles. Upon filing for Chapter 11
    protection, a debtor is immediately, repeatedly, and
    consistently subject to disclosure requirements that vastly
    exceed those imposed upon public companies not in bankruptcy.
        I believe Congress plainly intended these transparency
    mechanisms to advance the due process rights of a debtor and
    every constituency impacted by that debtor's bankruptcy, with
    severe consequences imposed upon the debtor if it fails to
    satisfy those obligations.
        Stated generally, filing for Chapter 11 protection means a
    corporation affirmatively places itself under Federal court
    supervision. The bankruptcy court must authorize not only a
    debtor's entry into and exit from Chapter 11, but it must
    authorize every action of substantive import to be taken by the
    company at all times subject to notice, and an opportunity to
    object by all parties in interest before the court.
        Put simply, if a corporation is seeking to evade
    accountability by manipulating Chapter 11, it must overcome
    stakeholder opposition and bankruptcy court oversight every
    step of the way. And if that effort is flailing, the debtor
    can't simply quit Chapter 11 and walk away from bankruptcy
    court supervision unless the judge expressly grants permission
    to leave.
        Next, Congress in the Bankruptcy Code also provided
    stakeholders with multiple procedural and substantive
    mechanisms to combat potential improper debtor conduct. These
    provisions include expansive standing and discovery rights, the
    ability to seek to lift the automatic stay of litigation
    against the debtor, the ability to seek the appointment of a
    trustee or examiner to run, or investigate the debtor. Taken
    together, these provisions are designed to ensure that a debtor
    may not misuse Chapter 11 to shield, hire, hide, or transfer
    away assets from stakeholders that have a legal right to that
    value.
        Finally, from my perspective as a practitioner, what is
    largely missing from this debate is the centrality of
    bankruptcy court judges in enforcing accountability. 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.
        Even assuming otherwise, the adversarial tools that
    Congress provided to stakeholders in Chapter 11 serve as a
    deterrent and, if needed, a remedy from manipulation. Proving
    that there is widespread evasion of accountability, therefore,
    would logically imply that there's a breakdown in the
    application of Chapter 11, which brings into focus the
    indispensable role of bankruptcy court judges. My testimony
    sought to address a few arguments that are raised, but given my
    time, I'll just touch briefly on two.
        One implied criticism is that because bankruptcy court
    judges are not appointed under Title III, and bankruptcy courts
    do not have jury trials, that it's suboptimal for bankruptcy
    court judges to resolve issues involving mass tort allegations,
    which might otherwise be entitled to a State or Federal court
    jury trial.
        As a threshold but critical clarification, Chapter 11
    addresses the resolution of claims against a debtor. It is not
    the substantive law that governs liability for those alleged
    claims. Beyond providing for bankruptcy court rulings to be
    appealed to higher courts, Congress also specified that any
    and--party in interest may ask the district court to withdraw
    the reference of a Chapter 11 case, in whole or in part, from
    the bankruptcy court so that one or more issues can be heard by
    an Article III judge as appropriate. May I make one more quick
    point?
        Chair Durbin. [Gesture is made for approval.]
        Mr. Hessler. Thank you for the extra time. The last point I
    would just want to make is just as a practical matter. Recent
    rulings in certain high-profile mass tort Chapter 11 cases, I
    think, speak for themselves. And that's perhaps the most
    straightforward and compelling response to a contention that
    bankruptcy court judges are somehow failing to enforce the
    accountability provisions that Congress enshrined in the
    Bankruptcy Code. Thank you. I appreciate the opportunity to
    answer questions.
        [The prepared statement of Mr. Hessler appears as a
    submission for the record.]
        Chair Durbin. Thanks, Mr. Hessler. Professor Parikh.

      STATEMENT OF SAMIR D. PARIKH, ROBERT E. JONES PROFESSOR OF
    ADVOCACY AND ETHICS, LEWIS & CLARK LAW SCHOOL, PORTLAND, OREGON

        Professor Parikh. I would like to thank the Committee for
    inviting me to testify today. It is a great honor to be here.
        My name is Samir Parikh. I'm the Robert E. Jones Professor
    of Advocacy and Ethics at Lewis & Clark Law School.
        A recent discussion about mass tort bankruptcies have
    certainly provided a lot of fire, but not a lot of light. So
    I'd like to step back for a second and ask a very simple
    question. What are our process objectives here? What are
    policymakers trying to accomplish by resolving mass tort cases?
        I argue that the clear objective should be to provide
    meritorious claimants the recovery they deserve on the shortest
    timeline. If that is the guiding light, then you can see why
    bankruptcy may be the optimal venue in many mass tort cases.
        Well, why did we land here? Well, we can take a step back
    and just look at it from the perspective of, well, what's on
    the table? What are the resolution options that are available?
    Mass tort cases oftentimes cannot be resolved through class
    aggregation under Rule 23 of the Federal Rules of Civil
    Procedure.
        Supreme Court jurisprudence at the turn of the century made
    it very clear if a case has future claimants or too many
    individualized issues regarding damages and causation, then
    that case cannot be resolved through Rule 23. So that's been
    taken off the table.
        So what's stepped into the void? Multi-district litigation
    stepped into that void. MDL has had a lot of successes, but it
    has a mixed reputation. So MDL cannot offer a global
    settlement. MDL cannot marshal claims in State court or claims
    held by future claimants.
        Okay. So what does MDL offer? It offers an arena to have a
    settlement negotiation. Okay. But as we all know, just because
    parties are talking doesn't mean that settlement can be
    reached. That's why a lot of cases in MDL drag on for years--5
    years, 7 years, 10 years. Keep in mind, this is a captive
    process. Claimants cannot opt out. They can't just say, I don't
    want to be here anymore. I'd like to have my day in court. That
    is not an option.
        MDL also lacks transparency, and that's why a lot of
    claimants have voiced their displeasure with it. So this is the
    reason why a lot of corporate defendants, a lot of stakeholders
    have started to opting into bankruptcy.
        So what does bankruptcy offer? Well, bankruptcy offers
    global settlement. You can marshal claims in Federal court and
    in State court, you could marshal claims held by current
    claimants and future claimants. Bankruptcy also offers the
    settlement model where parties can have that negotiation that
    they could have in an MDL.
        If they can reach resolution, that's great. That can be
    confirmed.
        But if they can't, the bankruptcy court judge is authorized
    to intervene. At that point, the judge can estimate the
    aggregate value of all the claims in a particular case. The
    corporate debtor can take that information and make a
    settlement offer to victims.
        If claimants decide that this is a fair offer, they can
    vote accordingly. If a super majority feel that way, that
    settlement can go forward and a plan can be confirmed. That's a
    very powerful option.
        Also, bankruptcy offers a lot of transparency that shines a
    very bright light on these proceedings, which is very valuable.
        It's hard to say bankruptcy's perfect. Bankruptcy's not
    perfect. There's lots of things that could be fixed. I just
    have three things I'd like to note very quickly.
        First and foremost is Section 524(g). That only applies to
    cases that involve asbestos claims. I think 524(g) should be
    amended to expand and include all mass tort cases. That way you
    get uniformity in process and outcomes.
        Also, when we think about future claimants, they have a
    representative appointed in bankruptcy cases. This is called a
    future claimant's representative. That person's appointed by
    the bankruptcy court. The process to appoint this individual is
    fundamentally broken and needs to be revisited.
        The final piece is nonconsensual non-debtor releases. These
    releases play a vital role in finding resolution in many mass
    tort cases. Without them, resolution would not be possible.
        Under this arrangement, a third-party makes a significant
    contribution to a victim settlement trust. In exchange, civil
    claims against that party related to the case are channeled to
    that trust.
        Once again, it provides many cases of meaningful recovery
    and enhanced recovery for claimants in these cases. So it's
    very valuable.
        I believe Section 5(24)--or excuse me, I believe the
    Bankruptcy Code actually supports these types of releases, but
    the language could be amended to make it very clear that this
    form of relief is available.
        In concluding, I would just like to note, going back to
    the--where I started, you know, what's the objective here? I
    feel like that doesn't get discussed a lot. The objective is,
    once again, trying to find meritorious claimants the recovery
    they deserve on the shortest timeline.
        If that is the guiding light, I do believe bankruptcy is
    oftentimes the optimal venue in many mass tort cases. I hope we
    have time to talk about how to improve that platform instead of
    merely talking about how to tear that platform down. I thank
    the Committee for this time, and I look forward to your
    questions.
        [The prepared statement of Professor Parikh appears as a
    submission for the record.]
        Chair Durbin. Thank you, Professor. Ms. Knapp.

            STATEMENT OF LORI KNAPP, GREENEVILLE, TENNESSEE

        Ms. Knapp. Thank you for inviting me to be here. My dad, Ed
    Chapman, died from asbestos cancer caused by asbestos found in
    drywall products that he worked with in the 1970s.
        He and a small group of other workers, about 10 men in
    total, worked on many projects together using the same products
    and tools. At least three of those men died from mesothelioma--
    a cancer so rare that, generally, only 1 in 100,000 people get
    it.
        These men have been wiped out by asbestos. The asbestos
    products that killed my dad were manufactured by and sold by
    Georgia-Pacific and other companies. Georgia-Pacific knew that
    their product was incredibly dangerous, but continued to sell
    them.
        In 1971, Georgia-Pacific's secret internal documents
    acknowledged workers would get sick from asbestos and that they
    would sue Georgia-Pacific. But Georgia-Pacific didn't care.
        Instead, they--in the same documents, they callously
    announced a plan to blame these men for their own cancer.
        My dad taught me that we are all accountable for our own
    actions. When my dad got sick, he hired lawyers to hold these
    companies accountable for sickening him, and for killing his
    friends. Dad was able to sue some of the companies, like Union
    Carbide, in the Florida court system.
        Other companies, like United States Gypsum, were actually
    bankrupted by their asbestos liabilities years before my dad
    had claims. So he still claimed against the trust and tried to
    get some of the money that was left.
        Georgia-Pacific though is not bankrupt. But they got a free
    pass. They filed the Texas Two-Step forcing the victims to
    compromise their right to a jury trial, and to accept a reduced
    settlement in the bankruptcy court. My dad chose to fight. He
    refused to go along with the blackmail, and he died without
    being able to see justice.
        Georgia-Pacific filed its bankruptcy before my dad got
    sick. The stay that was put into place protecting Georgia-
    Pacific has remained in place for over 6 years.
        Meanwhile, it has been business as usual for Georgia-
    Pacific, which has paid $5 billion in profits to Koch
    Industries while the victims have received zero. Nothing.
        When my dad's case went to trial in March of 2020, all the
    defendants that had not settled were in the courtroom. My dad
    was too sick to be able to attend, and he was isolated. But the
    lawyers and I were in court. This was literally right before
    COVID shut down the courts. But my dad had very little energy
    and couldn't really be exposed to a lot of people. So he stayed
    in the hotel. All the other companies negotiated settlements.
    This was the best he could hope for because there was no magic
    wand to make the cancer go away.
        Georgia-Pacific has gotten away with letting people die. My
    dad died an excruciating, horrible death that he did not
    deserve. In the meantime, Georgia-Pacific's bankruptcy, he
    never got a chance to see any kind of justice from them.
        To make matters worse, the delay will likely mean that
    Georgia-Pacific and Koch Industries escape any accountability
    for what they did to my father, which is a windfall for Charles
    Koch who is already the 20th richest person in the world.
        Under Florida law, if an individual is harmed but dies
    before their trial, their claim for pain and suffering dies
    with them. Even if Georgia-Pacific's fake bankruptcy is thrown
    out, Georgia-Pacific will argue that my dad's estate has no
    claim.
        And make no mistake, my dad was brutalized--had an
    agonizing suffering and a humiliation from this asbestos
    cancer. My husband and I cared for my dad during the last
    months of his life. I can personally attest to the horrible
    experience that my dad suffered.
        It is wrong that Georgia-Pacific continues to try to dodge
    accountability. When Koch Industries bought Georgia-Pacific, it
    knew Georgia-Pacific's asbestos products had sickened and
    killed thousands of Americans. That didn't stop Koch Industries
    because Georgia-Pacific is a massively profitable company.
        Bankruptcy is for people and companies that can't pay their
    bills. These Texas Two-Step fake bankruptcies have turned the
    bankruptcy courts into a sham where profitable companies go to
    avoid responsibilities they're fully capable of paying.
        America was founded on the principle that all men are
    created equal. But the reality of the Texas Two-Step bankruptcy
    is that they allow huge, profitable companies to delay or avoid
    entirely taking responsibility for their actions.
        My dad was my hero. He was a devoted husband. While my dad
    was struggling with his asbestos cancer, his wife, my
    stepmother, Ruth, developed pancreatic cancer. It was
    devastating to my dad.
        He was struggling for his own life, and now he was trying
    to take care of his wife that was dying. My dad never quit
    taking care of himself, and he never quit trying to take care
    of Ruth. But slowly the cancer consumed him. Seeing them
    through to the end was important to my dad.
        The fact that Georgia-Pacific, with all of its profits, was
    effectively immune from responsibility, frustrated and confused
    my dad. How could a company that was massively profitable,
    whose products you see in nearly every bathroom, every office,
    every building, every restaurant, every school, file for
    bankruptcy? And how could the rights be put on indefinite hold
    due, while Georgia-Pacific sends billions of dollars of profits
    to Koch Industries?
        It pains me to know that this abuse of this bankruptcy
    system has been now copied by other massively profitable
    companies, like Johnson & Johnson. This is wrong. Asbestos
    products have devastated American workers and their families.
        When profitable companies file for bankruptcy, for the
    express purpose of avoiding juries by stranding sick Americans
    in the bankruptcy system, while the companies continue business
    as usual, that's abuse and it needs to stop.
        My dad was a fighter. He saw things through to the end. My
    dad was not my biological father. He married my mother when I
    was an infant, but he's the only dad I've ever known. And I
    couldn't have asked for a better dad. Right before he died, my
    dad drove himself to the Okeechobee County Courthouse, and he
    legally adopted me.
        While that never mattered to me, he was my dad no matter
    what. It did matter to him, and he was going to finish the job
    of being my father. And he made sure he finished the job. Dad
    taught me to speak up against injustice and abuse, and to hold
    myself and others accountable for their actions.
        And Dad taught me to see things through to the end. I am
    here to honor him by continuing his fight, by seeing it through
    to the end, and making sure that Georgia-Pacific doesn't get
    away with this abuse. I ask you to do the same. Thank you.
        [The prepared statement of Ms. Knapp appears as a
    submission for the record.]
        Chair Durbin. Thank you, Ms. Knapp, for telling us about
    your dad, and reminding us, at the heart of this issue that we
    are debating is not a Bankruptcy Code, but a real human being
    who lost their lives because of exposure to asbestos. And
    simply, were trying to find their day in court. Thank you very
    much for that.
        We now will go through the rounds of questioning of 5
    minutes by each Senator.
        Mr. Haas, I understood bankruptcy in a basic form to say,
    you're a company and you have more debts than you have assets.
    And you go into court and say, I want to be discharged from
    this debt, I'm prepared to pay whatever I can. I want a fresh
    start.
        So I take a look at Johnson & Johnson and say, does that
    fit in this situation? That they would go to bankruptcy court?
        [Poster is displayed.]
        In October, 2021, when LTL first filed bankruptcy, Johnson
    & Johnson had a market capitalization of approximately $420
    billion. 2022, year following LTL's bankruptcy filing, Johnson
    & Johnson generated $94.9 billion in sales and $63.9 billion in
    profit. September, 2022, Johnson & Johnson announced a $5
    billion stock buyback. Johnson & Johnson paid a dividend in
    every quarter since LTL declared bankruptcy, returning even
    more money to shareholders.
        You've dismissed the claims against you for possible
    asbestos in your product, calling them ``meritless junk
    science,'' ``one-off,'' and beyond that. And yet, you put a
    valuation through LTL of $8.9 billion in these claims.
        How can you have it both ways? How can you be a profitable
    corporation worth that much money and say these meritless
    claims were worth $8.9 billion and you shouldn't be responsible
    for them?
        Mr. Haas. Chairman Durbin, the----
        Chair Durbin. Turn the microphone on, please. Microphone.
    Thank you.
        Mr. Haas. The entity that sold and manufactured the talc
    was Johnson & Johnson's Consumer Inc. and it was in a loss
    position in 2020, the year before the LTL entity went into
    bankruptcy.
        So JJCI could have gone itself into bankruptcy. This is not
    a story about J&J, it's a story about JJCI, Johnson & Johnson's
    Consumer Inc.
        In the transaction that we undertook in order to put--
    create LTL into place, LTL in bankruptcy, well we actually
    provided the claimants--the talc claimants with more recourse,
    more assets than they would've had had we not done the
    transaction if JJCI as the enterprise had gone into bankruptcy
    alone.
        So what we were able to accomplish is two things, which
    were, as the Third Circuit recognized, the objective of the
    Bankruptcy Code. One is to optimize the recourse available to
    claimants, and the second is to make sure that viable
    enterprises can go forward to the extent possible----
        Chair Durbin. Mr. Haas, there's something missing here. Why
    would you create LTL, which made no products whatsoever, but
    simply was there as the repository of some funds for any
    liability, if, in fact, the underlying company that made this
    product in question--the company was worth so few assets at the
    time? It doesn't follow.
        Let me ask you another question. I think I read somewhere
    that your company, Johnson & Johnson, has changed the
    formulation of their baby powder over the years. Is that true?
        Mr. Haas. Johnson & Johnson Consumer Inc., the subsidiary,
    changed the formulation to take talc out and use corn starch
    instead. And they did that in 2020 because the demand for talc
    had gone down because of the advertising by----
        Chair Durbin. And it had nothing do with potential
    liability in a tort suit?
        Mr. Haas. Excuse me?
        Chair Durbin. It had nothing to do with your potential
    liability in a tort suit?
        Mr. Haas. No. To the contrary. As we stated at the time, it
    had to do with the demand that had decreased due to false and
    misleading advertising by the plaintiffs' bar. And that is at
    core what is the issue here. These claims are meritless. But
    nonetheless, even though they were----
        Chair Durbin. Meritless, but worth $8.9 billion?
        Mr. Haas. The $8.9 billion was an amount that we did not
    come up with. It is a number that the claimants came up with.
    The vast--counsel for the vast majority of claimants approached
    us with an offer. And they approached us and they said, if you
    are willing to pay $8.9 billion, we will take that. We
    claimants will take it. And that's why we went back into
    bankruptcy because we did so with written agreements from
    counsel for the vast majority of claimants----
        Chair Durbin. Vast majority of claimants, which, of course,
    means that others who wanted their day in court for
    establishing their own recovery wouldn't have that chance.
        Mr. Haas. In bankruptcy, in order for a plan to be
    confirmed, you need--for this particular type of plan, you need
    a super majority of plaintiffs. Not just the vast majority, but
    a super majority. And that plan needs to be confirmed by the
    bankruptcy court.
        So that plan would've been approved only into the extent
    that the super majority of claimants and the court determined
    it was the right thing to do. Our intent going into bankruptcy
    was to simply let the claimants and the court decide whether or
    not this was the appropriate resolution. Because, again, this
    was a plan that came to us--that was proposed to us as a
    resolution that was in the best interest of claimants.
        And the reason for that is twofold. One, we were winning
    the majority of cases in the tort system. So most claimants get
    nothing, absolutely nothing from litigating tort system.
    Second----
        Chair Durbin. You make two arguments here. Meritless.
    Claimants get nothing. They were recovering nothing. And yet
    somebody comes up with a figure of $8.9 billion and you jump at
    it?
        Mr. Haas. Right. And that is----
        Chair Durbin. You can't have it both ways. You just can't
    argue both ways. You went into bankruptcy court to limit the
    liability of Johnson & Johnson CI or Johnson & Johnson. And
    luckily, at least at one or two different levels, the courts
    have said, this is a sham, this is a maneuver in the court,
    which is not anticipated by the Bankruptcy Code. Senator
    Graham.
        Senator Graham. Finish your thought, Mr. Haas.
        Mr. Haas. Thank you. The bankruptcy court in dismissing the
    second time, actually encouraged, and that's the words of the
    court, quote, ``strongly encouraged,'' end quote, urged us to
    continue the process--to go forward with the bankruptcy
    negotiations, and to go back into bankruptcy to get it done.
    And why? Because the claimants supported the plan.
        So even though the bankruptcy court recognized that under
    the Third Circuit's novel new standard, which is different than
    every other circuit court in the country, the bankruptcy court
    said, nonetheless, you should go forward and do it because it's
    in the best interest of all claimants.
        And in the end, that is the key. Because if you're in the
    tort system, most of the claimants would receive zero, and it
    would take 3,000 years to have adjudicated the cases that had
    been filed at the time of the bankruptcy, let alone the
    additional thousands that it had been added thereafter. So the
    only way to get an equitable, efficient resolution was through
    this process.
        And you asked, why would we spend $8.9 billion? Litigation
    expenses. There were hundreds and millions of dollars being
    spent litigating meritless claims year after year, after year,
    after year. And yes, there was a desire to put a stop to that.
    And the way to put a stop to that, that was in the best
    interest of all parties--to claimants, was the proposed
    resolution they made.
        Senator Graham. Thank you. Mr. Hessler, mass tort
    litigation, are you familiar with that at all?
        Mr. Hessler. [Voice is off microphone.]
        Senator Graham. Okay. You need to put your mic on.
        Mr. Hessler. Yes.
        Senator Graham. So if you have a situation where a lot of
    people have been allegedly hurt, mass tort litigation allows
    for the consolidation of the claims. Right?
        Mr. Hessler. Yes, Senator.
        Senator Graham. Okay. And that's to get things moving
    quicker. You form a class, people enter into the class, and you
    can litigate for the entire class. The goal of that is to do
    what?
        Mr. Hessler. Get to a consensual resolution as quickly----
        Senator Graham. Okay.
        Mr. Hessler [continuing]. As possible.
        Senator Graham. Bankruptcy, in terms of settling
    outstanding litigation, has its own system. Is that correct?
        Mr. Hessler. It does have its own set of Federal bankruptcy
    rules. They're notionally consistent with the Federal Rules of
    Civil Procedure, but they actually move fast.
        Senator Graham. But the goal of this is to have claimants
    come in, resolve the matter, bring closure in a more expedited
    fashion----
        Mr. Hessler. Yes, Senator.
        Senator Graham [continuing]. Than general litigation.
    Professor Parikh, in the Johnson & Johnson case, did the system
    work, in your view?
        Professor Parikh. Did the system work in Johnson & Johnson?
    Well, the case was dismissed. We didn't necessarily get a
    chance to see that settlement be realized. So that's why I
    mentioned earlier this idea of going back to this objective,
    you know, getting meritorious claim into the recovery they
    deserve on the shortest timeline. That thinking was that
    would've been possible if this settlement would've been allowed
    to move forward.
        Senator Graham. Okay. So in terms of how to settle these
    claims, do you think bankruptcy--what changes would you
    recommend we make to the bankruptcy system?
        Professor Parikh. I outlined some of those in my oral
    statement. I think making one section of the Code applicable to
    all mass tort cases, that would be very valuable--the idea of
    improving the integrity of the system.
        When we think about who's representing future claimants, of
    course, these victims are not in the room. Someone has to
    represent their interests. The process of appointing that
    person has to be addressed to address, you know, due process
    concerns.
        And then also this idea of having the tools as Professor
    Jacoby mentioned. Right? So in bankruptcy, we have these power
    tools. Sometimes they are essential to reaching resolution, one
    of which is the third-party releases. These releases under very
    limited circumstances can be extremely----
        Senator Graham. Well, you're trying to encourage people to
    put money into the system, but what they get in return is
    finality. Right?
        Professor Parikh. Exactly.
        Senator Graham. Yes.
        Professor Parikh. Exactly. And the idea is that that could
    improve----
        Senator Graham. Yes.
        Professor Parikh [continuing]. Victim recovery.
        Senator Graham. I mean, you know, trying to get claimants a
    pot of money people can apply for in real time. Well,
    fascinating discussion.
        One thing I would say to the Committee is that there are
    different ways to resolve litigation--mass tort litigation,
    major claims against big companies. In social media, there is
    no model like this. So we may not agree on how to resolve this
    issue, but if you're harmed by social media, you have nothing.
    Zero. Zip.
        That's where I hope the Committee can come together and
    create rights of actions to the millions of Americans who are
    being abused without any opportunity to have their day in any
    court or any system.
        Chair Durbin. Thank you, Senator. Senator Whitehouse.
        Senator Whitehouse. Thank you, Chairman.
        Welcome, Professor Jacoby. I see that the lawyer/witnesses
    who support the corporate Two-Step have maneuvered to outnumber
    you, 3-to-1, on this panel. So stand your ground. It's good to
    have you here.
        Ms. Knapp offered a pretty compelling point, which is that
    by virtue of stalling her dad's recovery until after he had
    died, the system--the corporate--potentially liable party here
    was able to extinguish his pain and suffering claims. Make them
    vanish.
        Whereas, if they'd had to address them while he was alive,
    they would be a part of his recovery. Is that a legitimate use
    of delay by corporate defendants, and is it a real problem? Is
    she stating something that is a significant problem we should
    pay attention to?
        Professor Jacoby. Senator Whitehouse, I think your question
    goes to the very different environment of mass tort cases,
    especially proceeded by divisive mergers where there's not an
    operating company in bankruptcy.
        And the great majority of commercial, big corporate Chapter
    11s, that I believe that Mr. Hessler spends his time on, where
    it's less likely that one would fall into this circumstance,
    there should be many tools to keep Chapter 11s moving.
        If anything, some Chapter 11s may go too quickly, but that
    is not what's happening here in these divisive merger cases.
    They are indeed stalled and----
        Senator Whitehouse. And the consequences are----
        Professor Jacoby [continuing]. There are real consequences.
        Senator Whitehouse. That's what I was trying to get you
    to----
        Professor Jacoby. I'm sorry, Senator Whitehouse. Life and
    death. And I think that is very important. It's bankruptcy. And
    the experts in bankruptcy talk a lot about money, and, of
    course, they do. And in a lot of situations, that's all that's
    at stake.
        These kind of claims involve accountability, making sure
    something like this doesn't happen again, honoring and
    acknowledging misconduct, and letting people tell their
    stories. And bankruptcy is not designed for all of those
    things. Maybe it could be. So I am very worried about the
    concerns that you raised, Senator Whitehouse.
        Senator Whitehouse. So let's talk a little bit more about
    money. Mr. Haas made the point that the Johnson & Johnson
    bankruptcy fund measured favorably against the assets of the
    subsidiary, JJCI.
        It strikes me that Johnson & Johnson controls what assets
    are in JJCI. There are innumerable ways within a corporate
    structure of moving assets between subsidiaries.
        Why should the argument that, we're doing better than our
    divided subsidiary would provide, be given any credence at all
    when that measure--when that bar can be driven right to the
    ground by the very people who are seeking to dodge their
    responsibilities?
        Professor Jacoby. This question, again, goes to, I think, a
    division we see between the average commercial case and what's
    going on, especially, in the divisive merger cases, designed
    only for personal injury, wrongful death claims, and other mass
    tort context.
        Typically, corporate form is honored in bankruptcy. That
    the entity that has filed, we look to that. There are tools--I
    think as Senator Graham mentioned--such as fraudulent transfer
    to consider various corporate transfers. We also do need to
    look at non-bankruptcy tort law----
        Senator Whitehouse. Quick interruption----
        Professor Jacoby. Of course.
        Senator Whitehouse [continuing]. On fraudulent transfers.
    Are you aware of any fraudulent transfer challenge in a Texas
    Two-Step--type proceeding that has ever succeeded?
        Professor Jacoby. It takes a long time to tee them up. I
    believe they're underway, but it may be years----
        Senator Whitehouse. Haven't succeeded yet.
        Professor Jacoby [continuing]. Until they were resolved.
        Senator Whitehouse. Got it. Okay. And then, what is the
    risk of forum shopping here--where a big corporation that's
    doing business all over the country can pick the jurisdiction
    in which they love the bankruptcy judge the most, because he's
    the worst judge for plaintiffs and the best judge for the
    corporation?
        Professor Jacoby. These cases involve two layers of forum
    shopping.
        One is opting one's problems into the bankruptcy regime in
    the first place, rather than State court, rather than the MDL,
    other Federal courts, or fora.
        Then we get to the question that bankruptcy's corporate
    venue choices are unlike any other Civil Procedure Rules I'm
    aware of in the Federal system.
        The amount of latitude given to a big enterprise to choose
    its forum does not match how we typically do personal
    jurisdiction, how we typically do venue rules. And that does
    give a lot of latitude.
        I think there are a lot of reasons that a particular court
    might be selected. But this is a continuing issue really in the
    full range of corporate bankruptcy cases, but also we can see
    in mass tort cases.
        Senator Whitehouse. Thank you.
        Chair Durbin. Thanks.
        Senator Whitehouse. My time's expired, and you're holding
    up--very well outnumbered.
        Chair Durbin. Thanks, Senator Whitehouse. Senator Grassley.
        Senator Grassley. Yes. Professor Parikh, why are large
    corporations like Johnson & Johnson turning to the bankruptcy
    system to resolve these tort cases? But that leads me to your
    opinion. Should our focus be on the bankruptcy system or, more
    appropriately, on a broken mass tort system?
        Professor Parikh. That's a great question, Senator
    Grassley. I do think probably there's enough problems going
    around where both deserve some attention. But I do think the
    reason why a lot of companies are opting into bankruptcy for
    the reasons I noted in my oral statement, which is that if you
    are seeking global settlement on an expedited timeline,
    bankruptcy offers that.
        Also in terms of there's a fear that there are a lot of
    non-meritorious claims entering the system, MDL has not proven
    adept at addressing that phenomenon. And bankruptcy may not be
    adept at it either, but, at least, that it has represented an
    option at this point.
        So that's--I think that's the reason why a lot of corporate
    debtors are opting into bankruptcy, hoping to have finality,
    hoping to have certainty, but also hoping to settle this
    quickly. And that can be very good for victims--the idea of
    getting a recovery on a short timeline.
        Remember, these cases in MDL--if the bankruptcy didn't
    exist, these cases would be sent back to the MDL process. You
    don't get your day in court in MDL. You're a--you're captive of
    that system. We should be very clear about that. You do not get
    your day in court. There are bellwether trials, but that's it.
    So you're along for the ride as a claimant in that process as
    well. It has a lot of benefits for the right type of case, but
    most modern mass tort cases are not going to thrive and reach
    resolution in an MDL process.
        Senator Grassley. Okay. Mr. Haas, can you tell us what will
    happen if Johnson & Johnson's current pledge of $8.9 billion
    runs out, and how will Johnson & Johnson ensure that talc
    claimants achieve a fair measure of justice into the necessary
    future as long as the talc claims arise?
        Mr. Haas. Currently, we are in the tort system. So we will
    be litigating in the tort system until such a point in time
    that we reach another arrangement with the claimants as
    recommended by the bankruptcy court. And in the tort system,
    sir, Johnson & Johnson prevails in the vast majority. The
    overwhelming majority of the cases, 76 percent of the cases
    that have been tried.
        So, to the extent that we will be litigating in the tort
    system, that $8.9 billion will fund litigation for decades and
    decades to come. In which case, we believe, based upon the
    track record to date, that we will prevail in most of those
    cases because these claims are meritless. But it will take
    decades.
        The plaintiffs in the last bankruptcy hearing affirmatively
    represented and told the court that you can try no more than 20
    cases a year. At that rate, it won't just be the 3,000 years to
    try the existing cases, but it would be 20,000 years to try the
    cases that they say now exist. So ultimately, at the end of the
    day, the $8.9 billion is going to go to one place--lawyers who
    are litigating this case. A bankruptcy resolution would
    provide--and it is the only way to provide, in the short-term,
    an equitable resolution not only for the current claimants, but
    the future claimants. That is the only way that these claimants
    will receive their money.
        Senator Grassley. If your settlement is approved, what
    would be the minimum settlement for each individual plaintiff?
        Mr. Haas. That ultimately is decided by the plaintiff
    lawyers through what's called the TDP process which they set
    up--a tort distribution process. Effectively what it is, the
    number that is relevant from the company's perspective is the
    $8.9 billion that they requested that we provide as a condition
    of making that resolution. So ultimately, that is in the hands
    of the plaintiff lawyers.
        Senator Grassley. Okay. Mr. Hessler, outside of the
    divisional merger context, how often do you encounter
    nonconsensual third-party releases in these tort cases?
        Mr. Haas. Outside of the bankrupt--oh, I'm sorry.
        Mr. Hessler. Is that for me?
        Senator Grassley. Yes.
        Mr. Hessler. Outside of the mass tort context--to make sure
    I understand your question--how often are the third-party--the
    nonconsensual third-party releases litigated? Within a narrow
    confine of the United States Trustee's Office, frequently
    brings objections to third-party releases in the mass tort
    context. It's going to be litigated almost every time that it's
    included in a plan.
        Senator Grassley. Okay. Thank you very much.
        Chair Durbin. Thanks, Senator Grassley. Senator Klobuchar.
        Senator Klobuchar. Thank you very much, Mr. Chairman, and
    thank you for calling this important hearing.
        After a company files for Chapter 11, employees risk, as we
    all know, losing their livelihoods, health benefits, pensions,
    through no fault of their own. These are things that workers
    have worked hard for and have earned.
        I'm going to focus, I think, the nature of my questions on
    you, Professor Jacoby. This issue has become relevant in a big
    way in my State because just last month, Yellow Corp., one of
    the largest LTL carriers in the country, filed for bankruptcy.
    This bankruptcy jeopardizes the livelihood and health benefits
    of many hardworking Minnesotans, including 480 Minnesota
    Teamsters.
        Do you agree that it is important that the bankruptcy
    process protects workers, including collective bargaining
    agreements, wage claims, health benefits, and retiree pensions?
        Professor Jacoby. Yes, I do, Senator. And I certainly think
    that was an animating force of Chapter 11, to begin with. The
    idea of allowing companies to restructure to provide worker
    protections to save jobs.
        Senator Klobuchar. And how are the interests of a bankrupt
    company's employees currently treated under the Bankruptcy
    Code, and how would you improve bankruptcy protection for
    workers?
        Professor Jacoby. Well, one thing that I worry about is
    that workers can be used as a justification to ask for things
    that aren't actually in the Bankruptcy Code--very quick going
    concern sales, and other kinds of deals.
        And often that's premised on saving jobs--that this quick
    sale will save jobs, that agreeing to a loan at a very high
    interest rate will save jobs. And yet there's often no
    guarantee. It's often not in the--if we read the fine print of
    the sale agreement, there may be no guarantees.
        So I would like--I think there should be more examination
    of jobs--what happens to jobs, and the quality of those jobs in
    that kind of scenario. And I think we need to look at
    employment as well as in the union context, given so many of
    the companies that file for bankruptcy may not be unionized.
        Senator Klobuchar. Mm-hmm. Right. So are you talking about
    changing some of the provisions in law then?
        Professor Jacoby. I think that could be warranted. I think
    it also makes sense to continue to look at what kind of
    protection is given to worker claims.
        There are certain priority claims in the Bankruptcy Code
    that, often it's suggested, could be updated to give increased
    protection. And sometimes, in some cases, even admit those
    administrative priority claims or other priority claims are not
    honored as they should be. So I think that should be looked at,
    too.
        Senator Klobuchar. Mm-hmm. So the U.S. Trustee, a component
    of the Department of Justice, which is tasked, right, with
    overseeing the administration of these bankruptcy cases--so the
    Trustee plays a really important role in bankruptcy proceedings
    and represents the interests of the public. This often means
    ensuring that the interests of a debtor's unsecured creditors
    are represented.
        How can Congress work with the U.S. Trustee--it's a
    different way to do this--to ensure that the interests of
    employees and pensioners are properly represented and protected
    during a reorg.
        Professor Jacoby. So the complicated job that the
    Government watchdog has, which is what essentially the U.S.
    Trustee program and the Department of Justice is, is they're
    supposed to appoint a committee that speaks for a full range of
    creditors.
        And yet, we know, even within a mass tort case, the
    creditors are not an equal footing. They may not have equal
    strength of claim. So it's hard to have one for another. We
    expand that when we're talking about workers--how to make sure
    a committee is properly representative of those who need
    protection.
        If the committee does not incorporate the full range, what
    other mechanisms can there be to get the constituencies a seat
    at the negotiating table? Because bankruptcy's supposed to be
    about that collaboration. They need a seat at the table.
        Senator Klobuchar. And how could the Bankruptcy Code be
    improved--this is my last question--to better ensure that
    harmed consumers are respected during the restructuring
    negotiations, and you talk about victims, as well, in your
    testimony?
        Professor Jacoby. Sure. Well, that's a--I would love to
    think about that a longer time, and I'm happy to follow up with
    you. I do think that in terms of individuals, real humans, your
    constituents, who find themselves in a bankruptcy and say,
    ``What am I doing here? '' They need more of a voice in the
    process. The concept of procedural justice. That the process
    has to seem fair, independent of what the outcome is.
        And I think maybe many of us, I won't want to speak for
    anyone else, could agree on that. That there's more that the
    individuals can--that can be done to recognize their individual
    voice because they are not a mass, even if there are a lot of
    them. They're individuals with very different situations, and
    we need more recognition of that during a bankruptcy.
        It's not enough in a mass tort case to have that in a trust
    afterward. Those are private organizations, essentially, and
    very hard to see what's happening there. We need more
    procedural justice during a big Chapter 11 bankruptcy case.
        Senator Klobuchar. Okay. Thank you.
        Chair Durbin. Thanks, Senator Klobuchar. Senator Kennedy.
        Senator Kennedy. Thank you, Mr. Chairman. Mr. Haas, you're
    with Johnson & Johnson. Is that right?
        Mr. Haas. Yes, sir.
        Senator Kennedy. How is that stakeholder capitalism working
    out for you?
        Mr. Haas. How is it working for Johnson & Johnson? It's one
    of the greatest honors of my life.
        Senator Kennedy. Okay. I see where you, Johnson & Johnson,
    has joined with a number of other good American companies, JP
    Morgan--he's not a company, Mr. Colin Kaepernick, on his issue
    of police brutality, Procter and Gamble, Facebook, Apple.
        You all pledged $50 billion to, quote, ``be a force for
    social change and fight injustice''--$50 billion is a lot of
    money. How is that commitment consistent with what you're
    asking us to do here today?
        Mr. Haas. Sir, I'm not aware of the particular commitments
    you're referencing, but I could say dispositive----
        Senator Kennedy. Try to give me an answer--it's got to be
    right.
        Mr. Haas [continuing]. I could say dispositively that the
    consistency is, in the end, to ensure that each and every act
    that the company takes is consistent with our credo----
        Senator Kennedy. Okay.
        Mr. Haas [continuing]. And our credo puts the public and
    our patients first.
        Senator Kennedy. Right. Let me ask the professor a few
    basic questions because I'm still learning about this issue.
    Johnson & Johnson took it--oh, before I do, I forgot to ask you
    [points to Mr. Haas] one question: How many talc cases have you
    tried to verdict?
        Mr. Haas. There have been 42 cases that have gone to
    verdict. Of those, we have prevailed in 32.
        Senator Kennedy. Okay. So you've lost 10?
        Mr. Haas. Yes.
        Senator Kennedy. Okay. And what were the total damages in
    the 10 that you lost?
        Mr. Haas. The damages range dramatically----
        Senator Kennedy. Just give me a total.
        Mr. Haas. I don't know the total. I can give you an
    approximate. The highest one was in the billions.
        Senator Kennedy. Okay. All right.
        Professor, I don't want to just pick on Johnson & Johnson,
    but they're the one here. Let me pick on Georgia-Pacific. Okay?
    I don't want to pick on anybody. I'm learning on this issue.
        But let's call them Corporation A, gets sued en masse with
    respect to mass torts, they spin off the liabilities to a shell
    corporation, and that shell corporation files Chapter 11
    bankruptcy. Right?
        Professor Parikh. Sure.
        Senator Kennedy. Is that legal under the Bankruptcy Code?
        Professor Parikh. Is that legal? The Code does not restrict
    that necessarily. The courts have found that there are a
    variety of bases to reject that sort of action. So courts have
    been pretty active in this space. I should probably--Senator
    Whitehouse left, but----
        Senator Kennedy. What's--what's the consensus? I mean, some
    bankruptcy judges say this is a legitimate use of the
    Bankruptcy Code, I presume. Other bankruptcy judges say no it's
    not, and it's dismissed. Is that a fair statement?
        Professor Parikh. That is a fair statement. I think that
    it's the nuance here, if you don't mind----
        Senator Kennedy. What's the national----
        Professor Parikh [continuing]. I can flesh it out a little
    bit.
        Senator Kennedy. What's the national consensus on this?
        Professor Parikh. I think the national consensus is that
    this is a proper action under State law, but to the extent
    there is some sort of impropriety, bankruptcy court judges are
    very well positioned to police that, as we've seen in the LTL
    case.
        So it's not that Senator Whitehouse pointed out I was
    supporting Texas Two-Step. I am not supporting Texas Two-Step.
    I'm merely providing that----
        Senator Kennedy. So a bankruptcy judge has----
        Professor Parikh [continuing]. The extent there is a
    malfeasance, it could be addressed.
        Senator Kennedy [continuing]. The authority to say this is
    an abuse of the Code. Right?
        Professor Parikh. Exactly.
        Senator Kennedy. And how many----
        Professor Parikh. The courts can address that.
        Senator Kennedy [continuing]. Have done that?
        Professor Parikh. Well, the most prominent one is LTL. So
    in the Third Circuit now, there's a very rigorous----
        Senator Kennedy. Is there----
        Professor Parikh [continuing]. Test.
        Senator Kennedy [continuing]. A split among the circuits?
        Professor Parikh. There is, there is. So the Fourth
    Circuit, we were talking about forum shopping earlier, that
    would encourage forum shopping. Absolutely.
        Senator Kennedy. Okay. Is there a case before the Supreme
    Court to resolve this?
        Professor Parikh. No.
        Senator Kennedy. I bet there's one coming. I mean, and what
    are you--what are you asking us to do today? The Pro--let me
    start with Mr. Haas, again. What are you asking us to do today?
        Mr. Haas. The ask, from our perspective, to Congress would
    be to make uniform that very issue you just identified,
    whether--what is the standard with respect to dismissing a
    case?
        Now, there's a distinction between the propriety of a Texas
    Two-Step--let's call it that, it's a divisional merger
    statute--and the question of what is a standard that you apply
    when you dismiss a case?
        Our case was not dismissed because of anything to do with
    the Texas Two-Step. Nobody challenged the Texas Two-Step in our
    case. In fact----
        Senator Kennedy. Mr. Haas, you just had a golden
    opportunity to answer my question.
        Let me ask you, Mr. Parikh--and you [turns to Mr. Haas]
    didn't do it. Professor, tell me what you think we should do
    today?
        Professor Parikh. I think----
        Senator Kennedy. What do you think Congress should do?
        Professor Parikh. I think there are very large issues here.
    I think, as I mentioned before, 524(g) needs to be amended to
    capture all mass tort cases. Once that's done, you can have
    uniformity in process and procedure with all these cases. Some
    involve asbestos, some don't.
        The Code could be revised to provide clarity on whether
    third-party releases can be part of a plan. I think that'd be
    very helpful, and, of course, the future claim is represented.
    If that could be modified, have some more integrity in that
    selection process, those pieces together, I think, would really
    improve the process.
        Senator Kennedy. Thank you. Thank you, Mr. Chairman.
        Chair Durbin. Senator Kennedy asked a good question. We
    tried to follow through on it, as to just what were the
    verdicts or the settlements in these cases? We--some of it is
    hard to come by very quickly.
        But there was one case in Missouri, it was $4.69 billion
    for a group of 20 claimants, reduced on appeal to $2 billion.
    To give you a range here.
        But remember the offer from Johnson & Johnson through LTL
    was for $8.9 billion for 60,000 claimants. Put that in
    perspective.
        Next up, I believe, is Senator Hirono.
        Senator Hirono. Thank you, Mr. Chairman. Professor Parikh,
    you mentioned that what we describe as a Texas Two-Step is a
    proper action under State law. Those two States being Texas and
    Delaware, those are the only two States that allow for divisive
    mergers. Is that not so?
        Professor Parikh. It's also Pennsylvania and Arizona--a lot
    of them.
        Senator Hirono. Oh, so there's a third State.
        So I have a question for Professor Jacoby. The Texas Two-
    Step that we're talking about today, which is, as I said, also
    possible under Delaware, and now we're told Pennsylvania law,
    relies on a quirk of State corporate law. But it is far from
    clear to me that a State fraudulent transfer law would actually
    allow these divisive mergers to be treated as anything other
    than fraudulent transfers.
        In any event, shouldn't we establish some sort of Federal
    minimum standard to prevent a race to the bottom among the
    States all trying to create innovative ways to attract
    corporations considering bankruptcy? So what used to be just
    Texas and Delaware, now Pennsylvania is getting in on the
    action, as far as I can tell, enabling Texas Two-Steps.
        So should we be considering some sort of a minimum kind of
    standard to make it a lot harder for people to avoid this kind
    of litigation?
        Professor Jacoby. So the--certainly, if a case is properly
    within the domain of the bankruptcy system, as that's defined
    in the constitution--which I think of it more narrowly than
    some of my colleagues here--then you certainly have the right,
    when a case is in that domain, to set additional rules.
        And we have an example of that now where Federal fraudulent
    transfer law can apply to divisive merger bankruptcies--that is
    being teed up in, I believe, the Western District of North
    Carolina cases. And that's true even if State law seeks to
    declare in a statute or a court that under State law it would
    not qualify for fraudulent transfer.
        So, yes, Federal bankruptcy cases and Congress has the
    authority to set rules in the bankruptcy regime, and that has
    already--there already is a law to start that. It takes a lot
    of work to make it apply. It can take years.
        Senator Hirono. What is the law that starts that process
    that established some sort of a Federal standard for fraudulent
    transfers?
        Professor Jacoby. It is Section 548 of the Bankruptcy Code.
        Senator Hirono. There just seems to be something wrong with
    these divisive mergers that enables a corporation to establish
    another entity, which then files for bankruptcy so that they
    can get out from under the kind of litigation that they would
    otherwise be subject to. So even under the kind of mass torts
    situation, isn't there a way for settlements to occur?
        Professor Jacoby. The vast majority of torts--mass tort
    settlements occur outside of bankruptcy. I think it's
    interesting to look at the opioid cases. There was a lot of
    attention. And of course, one is going to the Supreme Court,
    the Purdue Pharma case.
        There have been several others about the importance of
    those settlements, and I don't take anything away from the
    opioid abatement money that would come from them. But they are
    a small fraction of the total settlement value. The idea that
    one cannot settle mass tort actions outside of bankruptcy, I
    don't think----
        Senator Hirono. I think so.
        Professor Jacoby [continuing]. Holds up.
        Senator Hirono. And also the vast--wouldn't you say the
    vast majority--or majority of tort cases are settled?
        Professor Jacoby. The vast majority of nearly all lawsuits
    are settled----
        Senator Hirono. That's right.
        Professor Jacoby [continuing]. Or dismissed early. So a day
    in court can mean more than the trial. It means starting the
    process, having discovery, being able to ask questions, and
    then deciding to have a resolution. And taking the result, win
    or lose.
        Senator Hirono. And the thing about Chapter 11 bankruptcy
    is it has nothing to do with liability or they--having any kind
    of discovery that leads to concerns about liability. And
    usually when you do enter--do discovery, you can pretty much be
    able to argue the strength of liability, which also--which then
    encourages parties to settle. Isn't that so?
        Professor Jacoby. So I do want to emphasize that the
    bankruptcy system does use rules of procedure, does have
    discovery. The question is what it's used for and how much
    control claimants may have in that process.
        I also do--if you'll indulge me, the vetting of these
    claims, I think corporate defendants have an incentive in the
    mass tort context to defer that. And so we don't have that
    discovery.
        Senator Hirono. It seems to me that the discovery in a
    bankruptcy case has to do with whether X owes Y any money. In
    the case of a tort, there's negligence, there are damages,
    there are all kinds of other issues that arise. And that's why
    I just don't think that the bankruptcy laws particularly apply
    in a tort situation, even though these cases may take a long
    time. Thank you, Mr. Chairman.
        Chair Durbin. Senator Hawley.
        Senator Hawley. Thank you, Mr. Chairman.
        Mr. Haas, if I could just come back to you. Let me ask you
    about the Ingham case. I'm sure you remember that case. That
    was the one litigated in my State, in the State of Missouri, 22
    plaintiffs who alleged that your baby powder caused ovarian
    cancer. By the way, didn't the FDA find that there were traces
    of asbestos in your baby powder?
        Mr. Haas. The FDA outsourced to a lab that found asbestos--
    a trace amount of asbestos in one lot. And 150 studies
    thereafter were done of that batch and found no asbestos. And
    if there was asbestos----
        Senator Hawley. Okay, okay----
        Mr. Haas [continuing]. In that----
        Senator Hawley [continuing]. Okay. That's a lot of--that's
    quite the word salad, but if we just compress, I think the
    answer is yes. Right? Did the FDA find that there were traces
    of asbestos in your baby powder test?
        Mr. Haas. No. Ultimately----
        Senator Hawley. No?
        Mr. Haas. No. Ultimately----
        Senator Hawley. The Third Circuit got that wrong? I just
    read it in their opinion.
        Mr. Haas. Ultimately, if the----
        Senator Hawley. Wait, wait, wait. Answer my question. The
    Third Circuit was wrong about that? I just read it in their
    opinion. They said the FDA found traces of asbestos in your
    baby powder.
        Mr. Haas. The FDA outsourced to a lab that found a trace
    amount of asbestos----
        Senator Hawley. Okay, then the answer is yes.
        Mr. Haas [continuing]. Thereafter----
        Senator Hawley. So let's go back to the Ingham case then. I
    think it's a relevant question. Do you remember what the
    verdict was in the Ingham case? What the jury found, what they
    awarded?
        Mr. Haas. As the Chair properly stated, it was initially
    $4.6 billion for a consolidated trial of 22 plaintiffs. That
    was reduced thereafter to $2.2 billion.
        Senator Hawley. $2.24 billion, finally, on appeal. That's a
    lot of money. That's one case--22 plaintiffs, 20 at the end of
    the day because of the appeal. You were facing how many
    additional cases after that?
        Mr. Haas. We had thousands of thousands of cases.
        Senator Hawley. Thousands of tens of thousands. Right?
        Mr. Haas. That's correct.
        Senator Hawley. Okay. So one set of plaintiffs gets 2-plus
    billion dollars. You have the potential for--by that math, tens
    of billions more. Right?
        Mr. Haas. No, not necessarily. Because you recall, most
    claimants lose and receive zero. Why don't----
        Senator Hawley. So what you do is--well, after the Ingham
    case, your company panics. And what you do is, you then decide,
    ``Oh my gosh, we can't--we can't possibly do this. We can't--we
    don't want to pay these plaintiffs this kind of money.'' So you
    then create a separate company for the sole purpose of
    declaring bankruptcy and making sure that the tens of thousands
    of other plaintiffs get scraps.
        Mr. Haas. The proposal that we had would never succeed and
    would not have succeeded, but for the support of the claimants
    that had made the proposed resolution. We went to----
        Senator Hawley. I have no idea----
        Mr. Haas [continuing]. Bankruptcy court----
        Senator Hawley [continuing]. What you're saying.
        I thought it was plaintiffs who sued you [holds up
    documents] that went all the way to the Third Circuit where
    they said you couldn't do what you're trying to do.
        You're saying that they actually--you're saying the
    plaintiffs wanted this? They like the Texas Two-Step? The
    plaintiffs want to be denied their day in court and denied
    recovery?
        Mr. Haas. The majority of claimants'--counsel representing
    the majority of claimants, yes, do want this resolution because
    most claimants receive nothing.
        Senator Hawley. Let's talk about you----
        Mr. Haas. That was an aberrant one-off----
        Senator Hawley. Let's talk about what you did.
        First of all, I think it's outrageous--the idea that
    plaintiffs--plaintiffs want to be denied their day in court.
    That's why they took you to court. That's why the Third Circuit
    ruled against you.
        Let's talk about what you did. Here is an abbre--according
    to the Third Circuit--an abbreviated--abbreviated version of
    how you tried to avoid actually paying out liability.
        Old Consumer, which was one of your subsidiaries, merged
    into Chenango Zero, LLC, a Texas limited liability company,
    wholly owned subsidiary of J&J, with Chenango Zero surviving
    the merger.
        Chenango Zero then affected a divisional transfer--a
    divisional merger, rather, under the Texas Business Code by
    which two new Texas limited liabilities were created: Chenango
    One and Chenango Two--and Chenango Zero ceased to exist.
        Then Chenango One converted into a North Carolina limited
    liability company and changed its name to LTL. Chenango Two
    then merged into Currahee Holding Company, the direct parent
    company of LTL. Currahee survived the merger, and then changed
    its name to Johnson & Johnson Consumer Incorporated.
        Are you here to tell us that you think that this is a great
    way to proceed--and is fair to the consumers who had asbestos
    in their baby powder?
        Mr. Haas. Indeed. The claimants after that transaction had
    access to more recourse than they did before, which is
    exactly----
        Senator Hawley. More recourse?
        Mr. Haas [continuing]. Which is exactly the----
        Senator Hawley. You created--in the words of the Third
    Circuit, you created a company with the sole purpose of sending
    it into bankruptcy so you could limit your liability. Here's
    what I don't understand, Johnson & Johnson is a hugely
    profitable company. Isn't it?
        Mr. Haas. This is--where we're talking about the
    subsidiary----
        Senator Hawley. Oh, I know, you own them all. You own them
    all. So aren't you hugely profitable?
        I mean, how much money did you make on the COVID vaccine,
    for example?
        Mr. Haas. Nothing. Actually, we made nothing----
        Senator Hawley. You got billions of dollars in subsidies
    from the Federal Government. Taxpayers have paid you billions.
        How much did you make on opioids? All those opioids you
    prescribed? How much did you make on that over the years?
        Mr. Haas. I do not have that information.
        Senator Hawley. Really? I thought it was curious when you
    said that your company credo was to always put the public
    first.
        Mr. Haas. It is.
        Senator Hawley. Was that what you were doing when you were
    lying to doctors and patients about the addictive nature of
    opioids?
        Mr. Haas. We did----
        Senator Hawley. Is that why your company agreed to billions
    of dollars in settlements with States and other localities
    because of what you did to further the opioid crisis?
        Mr. Haas. We prevailed in the only two cases that were
    tried, and the jury determined----
        Senator Hawley. You settled for billions of dollars and I
    brought one of those suits, and it's the proudest thing I ever
    did as attorney general of the State of Missouri.
        Your company has made billions of dollars on American
    consumers, multiple times lying to them. And the idea of that
    you now are looking actively for ways to limit the liability
    for further torts you have committed against the American
    people, I think is outrageous. Absolutely outrageous.
        And if you want to know why the American people don't trust
    huge corporations, it's because of companies like yours. And I
    would just say to my colleagues, if you want to know why
    private rights of action are so darn important, and why we need
    to use them against the Big Tech companies, this is the reason
    why. One jury verdict got $4.6 billion.
        That's a hammer. Companies fear it. They fear it. It's why
    they're trying to distort the Bankruptcy Code to avoid it. We
    need to give more Americans the ability to get that recourse in
    court, and we need to change the Bankruptcy Code to make sure
    that companies like J&J can't avoid it. Thank you, Mr.
    Chairman.
        Chair Durbin. Thanks, Senator Hawley. Senator Coons.
        Senator Coons. Thank you, Mr. Chairman. And thank you for
    this hearing, and for the opportunity for us to examine some of
    these issues.
        I'll transition to a topic I understand hasn't been
    thoroughly explored, but that also has the potential
    consequence of plaintiffs being denied the ability to recover.
    And that's nonconsensual non-debtor agreements.
        And I'd like to ask, if I could, both professors to comment
    on this. Professor Jacoby, should non-debtor agreements include
    an opt-out provision so claimants can choose to file legal
    claims instead of being bound by the liability release?
        And if they do get an opt-out, if that were to happen, what
    effect would there be? Would we see fewer nonconsensual non-
    debtor agreements, and what effect would it have on how much
    money is available to claimants as, for example, happened in
    the mass tort case against Purdue Pharma?
        Professor Jacoby. Individual claimants should be presented
    the option of whether they will release, consensually, by
    contract, like they could do outside of bankruptcy or not.
        The discharge power in the Bankruptcy Code does allow the
    majority to bind dissenters with respect to the liability of
    the debtor. I do not believe that extends to direct liability--
    --
        Senator Coons. Hmm.
        Professor Jacoby [continuing]. Of third-parties.
        So it has to be by contract, and we'll see what the Supreme
    Court says about Purdue Pharma.
        But the idea that the only way to ever get a deal done is
    to mandate a broader discharge--and that is really what it is.
    We're talking about personal liability for direct claims, not
    insurance proceeds put into a trust. Then, that is a--that is a
    huge extension of the bankruptcy power.
        But lawyers are problem solvers. These corporations and
    their very excellent counsel will find a way forward. They do,
    in circuits that can't--that don't permit the same binding of
    third-party.
        Senator Coons. Well, as you're implicitly referencing, the
    courts of appeal are currently split----
        Professor Jacoby. Yes.
        Senator Coons. And the Supreme Court has agreed to take the
    issue up this term. This is a split specifically on
    nonconsensual non-debtor agreements. Is there room for Congress
    to act? And if so, what do you think Congress should do in this
    particular area?
        Professor Jacoby. Well, I--the way that the district court
    decision in Purdue Pharma, as well as the dissent in the Second
    Circuit of Purdue Pharma, lay it out, the current Code does not
    authorize third-party liability shields without consent.
        Clearly, not everyone has bought into that. The Supreme
    Court claims they're going to have this on a fast track. The
    question is whether Senate--the Senate acts more quickly to
    clarify that or not.
        But I do think it is important to distinguish between
    efforts to channel, say, insurance proceeds into a trust and
    guide claimants to that trust, is different from direct
    personal liability of a third-party. That's really where the
    issue lies.
        Senator Coons. Professor Parikh, any different views on
    these two questions-- both, whether there should be an opt-out
    provision, and if so, what consequence that would have for
    what's available to claimants? And then what, if anything,
    Congress might take up and consider doing either before or
    after the Supreme Court acts?
        Professor Parikh. Yes, Senator. I think for nonconsensual
    non-debtor releases, I think the Bankruptcy Code does provide
    for them. They play a very large role in these cases in
    reaching resolution. Keep in mind that the claims are not
    extinguished, they're merely channeled to this trust.
        I think the larger issue that once again almost never gets
    discussed is making sure these trusts are properly funded. That
    does not get discussed at all. And that's probably the much
    larger issue, from my perspective.
        In terms of opt-out provisions, you can see in recent mass
    tort cases there are opt-out provisions, but there are lots of
    strings attached. You can opt out as a claimant, but your
    ultimate recovery is capped at which you otherwise would've
    received through the plan. So there's a strong disincentive not
    to opt out.
        So with opt-out provisions, you know, we see them of course
    under Rule 23 when we think about class aggregation. There are
    always opt-out provisions. Plaintiffs' attorneys are very good
    at making sure that that's a limited option, but nevertheless,
    in bankruptcy, that option exists. But with all these strings
    attached, that's something that could be clarified through the
    Code.
        Senator Coons. Survivors of child abuse and advocates have
    raised concerns about other bankruptcy procedures that have
    been involved in cases like the Boy Scouts, and USA Gymnastics,
    and others.
        Are there reforms Congress should consider around claim
    filing deadlines or automatic stays that would specifically
    improve protection of survivors from harm in the bankruptcy
    process? Professor?
        Professor Jacoby. Well, thank you for asking about that.
    One thing I would like to see, before I give an answer from my
    perspective, is, I would love for this body to get to hear from
    more of the survivors who have participated in those cases
    because I'm not sure they feel heard right now about--in the
    process.
        The issue of bar dates and the proofs of claim, which I
    think you were asking about, which is very different than what
    we're seeing in the asbestos cases, where we, at least some of
    them, where we're not sure who the maj--it's hard to measure
    the majority if I don't know who all the claimants are.
        But there's a lot of variation in mass tort cases,
    generally, about whether we have a universe of current
    claimants or not. I think I'm not sure that has to be uniform,
    but I think it cuts a lot of different ways.
        For example, not having a bar date in a State that has a
    completely open statute of limitations, now in response to
    CHILD USA and other advocacy groups, about letting adults come
    forward in their time.
        Not having a bar date and letting someone collect in the
    future honors the research about the time it takes to come to
    that decision. A bar date forces someone to make that decision
    at a time they might not be ready--or forever be foreclosed.
        And again, to some of the discussion that's happened about
    releases and others, this is not just about the money. These
    claims are not being brought as far--again, it is--I don't want
    to speak for everyone because everyone's got their individual
    story.
        But there are a lot of other interests at stake about
    accountability and ensuring this doesn't happen to other people
    that are in addition to the money--or sometimes even more
    important to the money.
        Senator Coons. Yes.
        Professor Jacoby. So I think we need that. We really need
    to factor that in. This system was not designed for them.
        Senator Coons. Thank you. Thank you very much. Thank you,
    both. Thank you, Mr. Chairman, for your forbearance.
        Chair Durbin. Thanks, Senator Coons. Senator Blumenthal.
        Senator Blumenthal. Thanks very much, Mr. Chairman, and
    thanks for having this hearing.
        As you have heard on a bipartisan basis, there's a lot of
    dissatisfaction, and, indeed, disgust with the bankruptcy
    system as it currently operates, and now impacts the lives of
    ordinary people.
        Professor Jacoby, I have talked to many of those survivors
    of the gymnastics abuse that occurred. And they are very much
    on my mind as we talk about this issue. As you know, Larry
    Nassar's crimes came to light and implicated USA Gymnastics,
    which faced hundreds of lawsuits from gymnasts who alleged that
    the organization, in effect, was complicit and failed to
    protect them.
        And USA Gymnastics declared bankruptcy. Litigation was
    halted, depositions stopped. And their attempt to hold the
    organization to account for those hundreds of cases of sexual
    abuse was stymied. And the public was deprived of a lot of the
    truth about what USA Gymnastics did to make it liable and
    responsible.
        So I wonder whether there is a way, Professor Jacoby, to
    permit this process to go forward, that is, the legal process
    to go forward, at least with the discovery. You know, we call
    it discovery. It really, in that case, was discovery about what
    went wrong with USA Gymnastics.
        Professor Jacoby. The bankruptcy system absolutely can
    accommodate that. Indeed, early discussions of mass tort
    bankruptcy, I think, anticipated that way more would be done
    through other civil processes. That this would not cut
    everything off.
        The bankruptcy system also has the capacity within it to
    provide transparency that is sometimes missing way too much in
    mass tort bankruptcies for a variety of reasons.
        But there are ways to use the coordination features of the
    bankruptcy system that don't shut everything down, that make
    sure the accountability mechanisms still work.
        Now, whether that's the right home for all of this, people
    have different views. But if we're going to use it, that is
    absolutely essential.
        Senator Blumenthal. That's a relatively simple--and when I
    say relatively simple, compared to all the complexity of the
    system as it now operates, it seems relatively simple that we
    could reform.
        Professor Jacoby. Yes. And in addition, I believe some
    cases do anticipate data repositories. I think the question is
    when and who has the information? A lot of it is very hard to
    access, not only for the public, but individual claimants.
        There's information that's for lawyers' eyes only, and I
    think that makes--that makes people uncomfortable. People need
    to see it, not a couple years from now, but they need to be
    able to have access to it sooner.
        Senator Blumenthal. I want to turn to Purdue Pharma. As
    attorney general, I sued Purdue Pharma. I haven't been attorney
    general for a while, for 10 years, so I have no direct
    involvement in the pending case or the settlement. But what I
    know for sure is that between 1999 and 2021, opioid overdoses
    killed nearly 645,000 people in America.
        And Purdue Pharma knew what it was doing because it knew
    when they settled a case that I brought against it, and then
    continued to fuel the addiction and substance abuse disorder
    that killed those people.
        Let me cut right to the question here. And you all are
    aware of this case. In exchange for contributing about $6
    billion to the proposed settlement, the Sackler family, the
    individual Sacklers, have requested immunity from all current
    and future opioid lawsuits.
        The family hasn't declared bankruptcy. They're not subject
    to any of their requirements of transparency that are imposed
    on other parties, and they are trying to use the process, in
    effect, to buy immunity without the consent of their victims.
        I know that many of the survivors are supportive of the
    settlement, and I know why, because they want some compensation
    for the heartbreaking and unspeakable suffering that they have
    endured as a result of the wrongdoing of the Sacklers and the
    company.
        But yesterday, Senators Warren, Welch, and I reintroduced
    the SACKLER Act, which would close the loophole that has
    permitted the families to try to avoid accountability and
    responsibility.
        I'd like to ask any of the panelists who have an opinion on
    this issue to provide it.
        Professor Jacoby, it looks like you may----
        Professor Jacoby. I'd be----
        Senator Blumenthal. Have one.
        Professor Jacoby [continuing]. Happy to, if you'd like. I
    just wanted to give my colleagues----
        Senator Blumenthal. Sure.
        Professor Jacoby [continuing]. A chance.
        So again, the--one question that always comes to mind is
    modeling legislation on a very specific case.
        And if I recall--I have not seen your most recent
    legislation. What I do recall is that it was focused on the
    claims of government representatives, and also making sure that
    government representatives were not stopped during the
    bankruptcy from exercising their police and regulatory--and if
    that's not where this is, then I'll switch gears.
        I think the part about making sure that the temporary
    injunction is not routinely expanded is quite important. It's
    something that came up in the 3M bankruptcy. But it came up
    even more in Purdue Pharma because it stopped Government
    regulators, not just--not just private claims. So I am--I have
    a lot of sympathy for that.
        I do have concerns about legislating only about Government
    for permanent releases because that does raise the question and
    possibly a negative implication that it's acceptable for
    private parties, and I am--I'm concerned about that question.
        But I understand why Members of Congress think that a
    discharge in bankruptcy goes to a debtor----
        Senator Blumenthal. Mm-hmm.
        Professor Jacoby [continuing]. Unless a creditor
    contracts--agrees to release their claim. That makes a lot of
    sense to me.
        Professor Parikh. Senator, may I just weigh in on this?
    Really quick statement to answer your question. A bankruptcy
    case does not halt criminal prosecutions. So, I just want to
    make sure that's clear.
        Chair Durbin. Thank you, Senator Blumenthal.
        Senator Blumenthal. Thank you.
        Chair Durbin. Senator Welch.
        Senator Welch. I want to pick up where Senator Hawley left
    off and where Senator Blumenthal left off.
        I understand, by the way, Senator Hawley asked the
    question, J&J made $27 billion last year?
        Mr. Haas. Is that a question--yes, I----
        Senator Welch. Yes. Is that right?
        Mr. Haas. I believe that's about the right amount----
        Senator Welch. All right.
        Two--the second thing I want to say, bankruptcy, as I
    understand it, is very simple. You're broke. And you can get
    discharged from your debts, but you don't get discharged
    without putting all your assets in the pot. Is that right,
    Professor?
        Professor Jacoby. That's right. And when we're talking
    about a company, Congress anticipated----
        Senator Welch. Okay.
        Professor Jacoby [continuing]. Legislated, with an
    operating company.
        Senator Welch. And that if I want to declare bankruptcy,
    all the assets I have, all the debts I have are in the pot, and
    they get distributed according to the rules of bankruptcy.
    Right? Same for a company.
        The tort system, which we've had forever, allows an
    individual who's been injured to sue me, to sue a company. And
    if I'm found liable by a jury, then I pay. Right? And--isn't
    that correct?
        So what's happened here with the--going back to Purdue
    Pharma, it's really mystifying to me, and I think it is to a
    lot of folks.
        They go into bankruptcy, and there's incredible evidence
    about the Sackler family individually--not only benefiting and
    becoming multi-billionaires, making contributions to the
    Sackler Gallery down here, having named buildings at
    universities--that they were part of the board, and they knew
    that the opioids they were selling were addictive.
        They hired management consulting firms to actually boost
    sales. They did this knowing that people were dying and
    suffering, and they are in bankruptcy where the Sackler family
    has a Sackler rule for how bankruptcy works: They put all their
    liabilities in there, and some of their money, but they keep
    billions.
        Is that how bankruptcy's supposed to work?
        There are--I'm going to ask you, Mr. Haas, is--do you buy--
    do you buy that? Do you think the Sacklers, who had knowledge
    of what they did with their company and killed people--biggest
    drug dealers outside of the Mexican cartel--do you think that
    they have the right to use bankruptcy, but not put all of their
    billions into the pot so the people who they've injured can
    have their claims adjudicated?
        Mr. Haas. I'm not personally familiar with the facts of the
    Purdue----
        Senator Welch. Or, make it simple.
        Mr. Haas [continuing]. Case. But I would say it's a stark
    contrast. And it is actually demonstrating the legitimacy of
    what we did.
        Senator Welch. All right.
        Mr. Haas. So that distinction----
        Senator Welch. That is--let me--I get it, you're with
    Johnson & Johnson, you're different----
        Mr. Haas. Mm-hmm.
        Senator Welch [continuing]. I mean, everyone's--but the
    Sacklers were able to keep their individual billions safe, and
    get the full benefit of discharge and bankruptcy. That's what
    they're looking to get.
        Mr. Haas. So Senator, I just simply do not know the facts
    and circumstances. I believe the standard that is applied--or
    has been applied in that case depends upon the totality of the
    circumstances. And ultimately the question--and I'm not
    familiar----
        Senator Welch. Okay.
        Mr. Haas [continuing]. With which side it comes out----
        Senator Welch. The part----
        Mr. Haas [continuing]. Is whether it's in the best interest
    of the claimants.
        Senator Welch. It's in the best interest of the Sacklers--
    --
        Mr. Haas. But----
        Senator Welch [continuing]. They keep billions.
        Mr. Haas. Sir, I'm not taking a position one way or the
    other----
        Senator Welch. All right.
        Mr. Haas [continuing]. But I just think----
        Senator Welch. The other thing that seems simple, I think,
    to everyday folks, if a company is being sued and it has
    assets, in the case of Johnson & Johnson, great company, $27
    billion in profits. The mechanism that's being set up is to
    protect Johnson & Johnson, not the plaintiffs.
        Mr. Haas. The mechanism that was utilized had nothing to do
    with Johnson & Johnson. It had to do with Johnson & Johnson
    Consumer Inc., a subsidiary that was in a loss position. So the
    question became, at that point in time, how best to protect
    claimants. And the divisional merger----
        Senator Welch. So----
        Mr. Haas [continuing]. That was undertaken put claimants in
    a better position. They had more recourse.
        Senator Welch. Do all the claimants--ma'am, you are a
    claimant. Right? Does that put you in the best position, right,
    and you're representing your dad?
        Ms. Knapp. Yes.
        Senator Welch. My condolences to you.
        Ms. Knapp. No. It wasn't in his best interest. I think
    that--I think that these companies are greedy, and they want to
    make it sound as if, though, the victims are greedy trying to
    get what should be given to them. But if they wait long enough,
    all the victims will die. And then what? Just keep stalling.
        Senator Welch. Nobody could say it better. Thank you. I
    yield back.
        Chair Durbin. Thank you very much to all the witnesses and
    my colleagues. This is a compelling subject. It is complicated,
    and yet it's very simple.
        Ms. Knapp speaks for her father who died waiting for the
    moment to have his day in court. And Georgia-Pacific, in his
    case, found a way to avoid that reckoning, that confrontation,
    and justice was not served in his situation.
        I still don't believe there is a credible argument that
    Johnson & Johnson should have been allowed to create this sham
    corporation and limit their liability.
        When I think of all the Johnson & Johnson products that our
    family has used, that white cloud that's in every baby's room
    in America, and the trust we had in your company, I have to
    tell you it breaks my heart to think what it's facing today.
        And that is, the reality that they're trying to avoid
    responsibility for their own conduct and their own products.
    And that, to me, is not right.
        And I don't believe it's American. God knows, if anybody
    even conceived that the Bankruptcy Code would be used for this
    purpose, is just beyond me.
        And the Sackler situation is disgusting. You know, they're
    sitting on billions of dollars, and say they're not going to
    put this on the table for distribution to the people who are
    deserving unless they get a Get Out of Jail Free card in the
    process.
        Is that what our system of justice has turned out to be? I
    hope not.
        I thank you for this hearing. There may be some written
    questions sent your way in the next few days, and if you'd
    answer them promptly, I would appreciate it very much.
        And with that, the hearing stands adjourned.
        [Whereupon, at 11:56 a.m., the hearing was adjourned.]
        [Additional material submitted for the record follows.]

                                A P P E N D I X

    Submitted by Chair Durbin:

     American Tort Reform Association (ATRA), Washington, DC, letter..   129

     International Brotherhood of Teamsters, Washington, DC, letter...   134

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        Responses of Erik Haas to Questions Submitted by Senator Tillis

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              Responses of Stephen Hessler to Questions Submitted
                              By Senator Grassley

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            Prepared Statement of Lori Knapp, Greeneville, Tennessee

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           Responses of Prof. Samir D. Parikh to Questions Submitted
                              By Senator Grassley

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               Attachment I - Responses of Prof. Samir D. Parikh

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               Attachment II - Responses of Prof. Samir D. Parikh

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