Appellate judges zero in on corporate twists of bankruptcy shield

jJlogo-300x139Federal appeals judges have expressed skepticism about the scheming by Big Pharma and other big corporations to twist U.S. bankruptcy laws to let wealthy, powerful defendants shield themselves from major claims of harms filed by plaintiffs seeking justice in civil courts.

The U.S. Court of Appeals for the Third Circuit in Philadelphia has been asked to rule on the “Texas two-step” that Johnson & Johnson resorted to when hit with an avalanche of lawsuits over its legendary baby powder and claims by tens of thousands of patients who assert that asbestos-tainted talc contributed to or caused their cancer, NPR reported, noting:

“An attorney for Johnson and Johnson faced probing questions … over the corporation’s use of a controversial bankruptcy maneuver that has frozen tens of thousands of lawsuits linked to Johnson’s baby powder. During the hearing, members of a three-judge panel of the United States Court of Appeals for the Third Circuit in Philadelphia asked whether J&J had used the legal strategy to gain ‘a litigation advantage’ over roughly 40,000 cancer patients who have sued the company.”

J&J has denied any wrongdoing and insists that its talc met all accepted standards when sold. But as it has lost more cases, especially as civil trials of lawsuits have revealed not only the presence of cancer-causing asbestos in its baby powder and the company’s knowledge of this, J&J abruptly tried a different legal tactic, NPR reported:

“In October of last year, J&J — which is headquartered in New Jersey — used a wrinkle in Texas state law to spin off a new subsidiary called LTL. The health care giant pushed all baby powder-related liabilities onto the new firm’s books. Within a matter of days, LTL relocated from Texas to North Carolina and filed for bankruptcy, effectively halting the baby powder lawsuits.”

The company says the bankruptcy affects only this subsidiary, and J&J has continued as not only a titan of the industry but also in paying shareholders dividends.

The plaintiffs in the talc cases and their attorneys have cried foul. Big Pharma  and other corporations are upending accepted norms, by shoving large-scale liability cases into federal bankruptcy courts that legal scholars say were never intended to hear such matters. As Bruce Markell, a Northwestern Pritzker School of Law professor and retired bankruptcy judge, told the Wall Street Journal of this rapacious tactic: “This is an attack on the American tort system.”

This is not a casual disagreement among lawyers, jurists, and academics. It goes to fundamentals of the U.S. civil justice system and its operation. To see its inequity, just look at the differences between regular civil trial courts and bankruptcy courts. Both operate at the federal level. But the former’s authority is constitutional, while bankruptcy courts were a creation of Congress. As the U.S. Bankruptcy Court itself explains:

“A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial ‘fresh start’ from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision: ‘[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.’”

The patient-plaintiffs — as NPR noted, most of them women — say that bankruptcy courts give corporations unfair advantage. These courts try to preserve a business and quickly find ways for it to deal with its debts and to move on — not to even consider or to determine justice for those harmed, including rebuking and punishing wrongdoing.

While J&J lawyers argued that bankruptcy allows for an orderly, planned, and perhaps faster process to pay claims, judges at the appellate and trial court levels have seen how it allow the wealthy and powerful to dictate important terms to the aggrieved, for example, by setting one sum for a potential settlement, then telling plaintiffs to take it or leave it and to figure themselves how it might be divided, not accounting that some parties may have suffered greater harms than others. With the J&J subsidiary spun off, largely defunct, and without reason to settle in bankruptcy quickly, the talc cases could drag on, plaintiffs assert.

The plutocratic Sackler family added to their infamy by choosing its court, jurist, and haggling relentlessly in bankruptcy over how little of the clan’s billions of dollars made by a powerful opioid painkiller would be paid for the staggering damages the drug caused. The Sacklers not only retained a family fortune that most monarchs would envy but also declined to issue an apologize for their firm’s drug and how it debilitated, addicted, and killed too many. The judge in the case bemoaned the final settlement and noted how bankruptcy regulations left him few choices.

J&J and other pharma interests, as well as now a major nursing home chain, have clearly watched the legal maneuvers by Purdue and the Sacklers, as have the talc patients, NPR reported:

“[A]ttorneys representing women with claims against J&J slammed the health care giant’s legal strategy. ‘Talc victims … are mired in bankruptcy as they die,’ said attorney Jeffrey Lamken. He noted that during the LTL bankruptcy process, Johnson and Johnson has paid out billions of dollars to shareholders and for stock buy-backs – a practice not allowed for firms that are actually bankrupt. Meanwhile, women who filed cancer lawsuits against the corporation have been forced to wait and ‘can only get more desperate as they face medical expenses and come closer to their own deaths,’ Lamken argued. Attorneys representing cancer patients say the civil court system, not the bankruptcy court, is the proper venue for establishing the corporation’s liability.”

The U.S. Justice Department has intervened, taking the plantiffs’ side and arguing to the appeals court that allowing J&J and other big corporations to dodge civil courts for more favorable bankruptcy actions would upend the judicial system, NPR reported:

“[A] DOJ attorney argued that if this legal strategy is upheld by the courts, it would open the door to other non-bankrupt companies and wealthy individuals using similar maneuvers to avoid liability. ‘If Johnson and Johnson can get away with this bankruptcy, what’s to stop any other company in America from doing the same thing?’ asked Sean Janda, an attorney representing the U.S. Trustee, a division of DOJ that oversees bankruptcy cases.”

In my practice, I see not only the harms that patients suffer while seeking medical services, but also the damage that can be inflicted on them by dangerous drugs and as well the injury they can suffer due to  defective and risky products, especially those of the health care variety.

It is a privilege for my colleagues and I to assist regular folks and to witness the fortitude they must summon when they suffer harms and decide to seek justice in the often-intimidating civil system. Malpractice and product liability cases can be time consuming and draining. Testifying and exposing one’s life in court can be scary. But plaintiffs pursue legitimate claims, not just because they often will need a lifetime’s financial support after their injury. They also genuinely seek justice and redress for grievous damage done to them. They want to ensure that systemic wrongs get fixed so others will not suffer as they have.

Corporatists should not be allowed to jurisdiction-shop and to bowdlerize the bankruptcy system in profit-maximizing ploys. Bankruptcy judges should reject this ploy, as should appellate courts, and, yes, even the U.S. Supreme Court. This already has occurred when a bankruptcy judge refused to allow 3M to use this tactic to “find a way to control its costs stemming from 230,000 lawsuits on behalf of military veterans [over faulty earplugs], the largest single multidistrict litigation by number in U.S. history,” the Wall Street Journal reported.

Wise jurists know, as do legal scholars and seasoned practitioners, that in the federal system, the role of the bankruptcy system is the orderly, reasonable dissolution of businesses — not the determination of broader, complex, and difficult issues, including whether wrongdoing occurred and how justice might best be served.

Patrick Malone & Associates, P.C. listed in Best Lawyers Rated by Super Lawyers Patrick A. Malone
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