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Lindsey D. Simon, Bankruptcy Grifters, 131 Yale L. J. 1154 (2022).

There are two strands of tort scholarship. One group, whom I will call “The Philosophers”, seeks to understand tort as an internal system. A second group, “The Institutionalists”, seek to understand tort law as part of the larger legal system that governs harms, in comparison to administrative agencies, criminal prosecutions, and bankruptcy. Lindsey Simon’s article, Bankruptcy Grifters, is an important contribution to this latter strand of scholarship.

Relying on meticulously researched case studies and a deep knowledge of bankruptcy law, the piece clearly explains the difficult and complex use of bankruptcy to resolve mass torts (a feat in itself) and sets an agenda for further research and policy proposals. It should be required reading for torts scholars who don’t much understand how bankruptcy has emerged as an alternative to the tort system and what this development means for the tort system, particularly mass torts which threaten to eclipse all of tort law by sheer numbers.

Bankruptcy can do two things that the civil tort system cannot. First, bankruptcy can centralize claims. When an entity files for bankruptcy, all the tort claims against it in every jurisdiction in the United States, state and federal, are stayed in the courts where they were filed and channeled to the bankruptcy court for resolution. This is known as the “channeling injunction.”

Second, bankruptcy can bind all plaintiffs everywhere. “Bankruptcy can be used not only to settle defendants’ existing noncontingent liabilities,” Simon explains, “but also to discharge claims of unknown future claimants whose injuries have not yet manifested.” (P. 1163.) Importantly, this power to release parties applies beyond the entity filing for bankruptcy: third parties have also been included in these resolutions, although the legality of these releases is dubious. The most controversial of such third-party releases occurred in the Purdue bankruptcy, where members of the Sackler family (who had not filed for bankruptcy) were given a release of claims against them by individuals, states, and municipalities.

As Simon points out, bankruptcy imposes burdens on defendant-debtors as well. It is a costly process which involves substantial court and government oversight, including the appointment of a United States Trustee to monitor proceedings, committees that advocate on behalf of creditors (including mass tort victims), and substantial disclosure requirements. (P. 1164.) Non-debtors, however, incur no such costs. This is one reason that non-debtor releases are so controversial.

“What started primarily as a tool for the debtor’s insurers to compensate asbestos victims,” Simon writes, “has expanded in recent cases to include settlement-hungry codefendants who have only tangential legal connections to the debtor’s estate.” (P. 1154.) In its asbestos origins, mass tort bankruptcy is like all the other experiments that are so familiar to scholars studying mass torts, such as mass tort class actions (struck down in Amchem v. Windsor, 521 U.S. 591 (1997)) and consolidation in Multidistrict Litigation (governed by 28 U.S.C. § 1407 and going strong as of this writing).

After many years of both asbestos manufacturers and insurers using bankruptcy procedures to resolve threatened or ongoing litigation, in 1994 Congress codified the practice in § 524(g). That provision expressly applies to asbestos cases, but as Simon demonstrates, its use for other mass torts has grown over the last forty years, including by Dow Corning (in litigation relating to breast implants), Delaco (maker of “Dexatrim” diet pills), Blitz (a gas can maker), and, Simon’s main case study, Takata (the airbag manufacturer).

Simon explains three features of the Takata bankruptcy that she thinks make it a model mass tort bankruptcy. First, tort victims in the system could appeal without cost to them. Second, tort victims who met certain criteria could opt out of the trust and bring a lawsuit. Third, they were entitled to an individualized “hearing” to present information regarding their individual case and were not simply required to accept whatever amount a valuation schedule provided.

What about claim valuation? In the Takata bankruptcy, claims were paid in full because the trust received ongoing contributions from automakers. This, is in contrast to other cases where a trust is fixed, and tort victims are paid on a pro rata basis. The individual claims in Takata were valued according to a matrix, allegedly taking into account out-of-court awards for similar injuries. Of course, Takata airbags were recalled and there was little risk of ongoing liability for the foreseeable future, which distinguishes the Takata bankruptcy from the other case studies Simon analyzes.

In exchange for the right to appeal, opt back into the tort system, and full payment, the bankruptcy court in Takata extended non-debtor releases to car manufacturers.  Instead of abusing the process, Simon argues, Takata and the car manufacturers “used it to create a manageable process for organizing and paying claims.” (P. 1183.) She thinks this is a welcome model and contrasts the terms of the Takata bankruptcy with the opioids and  sex-assault mass tort bankruptcies. In those cases, the defendant-debtors and non-debtors released from liability were too distant to be legitimately included in a bankruptcy. She calls such third-parties “grifters” for this reason.

In the Purdue bankruptcy, for example, the Sackler family agreed to pay $4.325 billion–since then increased to around $6 billion–for complete release from all present and future liability. As Simon explains: “The Sackler contribution is significant but controversial given (1) the family’s direct involvement in, and profit from, opioid marketing that caused significant harm; and (2) evidence that the family has hidden assets overseas and beyond the grasp of claimants.” (P. 1189.) Notably, as they did not themselves declare bankruptcy, the Sackler family did not have to submit to the same disclosures and other requirements imposed on Purdue.

Even more disturbing are Simon’s case studies of sexual assault cases. Among these are: USA Gymnastics, whose bankruptcy purported to release the United States Olympic and Paralympic Committee and other related individuals and entities linked to the facility where Larry Nasser committed some of his abuse of young gymnasts; the Boy Scouts, whose bankruptcy released local councils that control a majority of the organizations’ property and assets; and the New Ulm diocese cases, which released all churches making up the New Ulm Diocese, New Ulm area Catholic schools, and all of their employees. As Simon explains, the bankruptcy court justified these releases “[b]ecause the most valuable church property is owned at the parish level, less is available in the debtor’s estate.” (P. 1202.) Meanwhile, in the New Ulm bankruptcy, the tort victims not only cannot opt out, they also face a system that requires a $500 payment to appeal, and that appeal is reviewed by the same person who reviewed their initial claim for compensation from the bankruptcy trust.  Some requirements for collection under the settlement do track the tort system, but others do not, including what seems like a much lower level of compensation, the individualized attention that a lawsuit would bring, and the bankruptcy’s overall cap on liability.

In sum, Simon demonstrates that the scope of third-party releases–initially intended to help insurance companies in the asbestos context manage their exposure–has ballooned to include people such as officers and directors (e.g. some of the Sacklers), subsidiaries (e.g. parishes), and individuals (parish employees), all of whom are freed from the threat of tort liability. The reason for these releases, as she points out, is either that the system needs money from these entities and individuals in order to provide an adequate level of compensation for tort victims, or that the entities are so intertwined that it is hard to separate them. Simon argues that non-debtor releases make sense for these reasons, but that the price paid by non-debtors to obtain release from liability should be higher. (P. 1203.)

No law review article would be complete without a final section on policy proposals, and Simon delivers here as well. She suggests Congressional action and greater attention to the problem by bankruptcy judges (although she is not hopeful because judges have an incentive to maintain their district’s status as debtor-friendly). She proposes more accountability checks, such as mandatory disclosures of non-debtor assets as a condition of releases. She recommends more procedural protections for tort victims channeled into bankruptcy, including: “(1) an opt-out process for claimants to return to the civil system; (2) the opportunity to provide supporting evidence to receive an individualized, pro rata award rather than a flat amount; (3) an automatic—and free—right to appeal; (4) an independent arbiter, both initially and on review; and (5) meaningful payment of awarded claims, for both current and future claimants.” (P. 1211.) She also suggests that non-debtor releases should be contingent on a finding that the releases are in the best interests of the tort victims, particularly an inquiry into whether including a particular entity will increase recovery. And she argues that high-value assets should not be excluded from bankruptcy if the debtor is to obtain the coveted channeling injunction.

What does this teach us about the tort system? Corporations accused of massive tortious harm claim that the civil justice system is “broken” and that they need bankruptcy in order to fix the problem. Corporations make this argument even in cases where the corporation itself can remain a going concern and doesn’t want to pay the heavy costs of bankruptcy. The recent decision by Johnson & Johnson to spin off a company saddled with its talc liability and have that entity file for bankruptcy, while Johnson & Johnson moves on, is a high-profile example.1 In that case, Johnson & Johnson promised to fund the new liability-only entity in exchange for the types of releases Simon describes, but how long will the money last? Eventually, the trust will wind down and there will be nothing left. Johnson & Johnson will have achieved closure for all its talc liability, tied up in a bow. And new plaintiffs will be shut out of any recovery.

Large-scale tort litigation arising out of mass-marketed, mass-produced products or mass institutional failure is too common for anyone’s comfort. It is not the civil justice system’s fault that massive wrongs happen, but it is the legal system’s responsibility to address them. If aggregate resolution is the only realistic solution because there are simply too many cases to resolve them individually, then these cases will flow to the place that is best able to offer the defendants what scholars call “global peace,” complete resolution of all present and future liability. That may be bankruptcy, class actions, or a large-scale settlement through an MDL.  Simon’s article is key to understanding the bankruptcy part of this system. It would be helpful for tort scholars to start thinking about how the important values of tort law, such as recognizing wrongs, holding wrongdoers to account, forcing information, and compensating victims, can still be achieved under these conditions.

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  1. For a journalistic description of Johnson & Johnson’s use of bankruptcy relating to its talc liabilities see Mike Spector & Dan Levine, Special Report: Inside J&J’s Secret Plan to Cap Litigation Payouts to Cancer Victims, Reuters, Feb. 4, 2022. For a more scholarly, but still short, explanation and objection see Adam Levitin, The Texas Two-Step: The New Fad in Fraudulent Transfers, Credit Slips, July 19, 2021. For a less critical scholarly view, see Samir D. Parikh, Written Testimony of Samir D. Parikh Regarding Mass Restructurings and Divisive Mergers (Before the Subcommittee on Federal Courts, Oversight, Agency Action, and Federal Rights), Feb. 8, 2022.
Cite as: Alexandra Lahav, Mass Tort Endgames, JOTWELL (July 14, 2022) (reviewing Lindsey D. Simon, Bankruptcy Grifters, 131 Yale L. J. 1154 (2022)),