[Senate Hearing 118-155]
[From the U.S. Government Publishing Office]
S. Hrg. 118-155
EVADING ACCOUNTABILITY: CORPORATE
MANIPULATION OF CHAPTER 11 BANKRUPTCY
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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
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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
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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
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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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses of Erik Haas to Questions Submitted by Senator Tillis
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses of Stephen Hessler to Questions Submitted
By Senator Grassley
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Lori Knapp, Greeneville, Tennessee
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses of Prof. Samir D. Parikh to Questions Submitted
By Senator Grassley
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Attachment I - Responses of Prof. Samir D. Parikh
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Attachment II - Responses of Prof. Samir D. Parikh
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[all]