When claims of harms rise, more corporations are diving into bankruptcy

bankruptcy-300x199They were a tortured part of the opioid abuse and drug overdose crisis. They have become a painful aspect of the push to hold nursing home owners and operators accountable for the shambolic response to the coronavirus pandemic.

And they soon may be an obstacle to military veterans’ attempts to get justice for defective devices that were supposed to protect their hearing.

Bankruptcy courts, the evidence increasingly shows, are at risk of warping their congressional mandate to help struggling enterprises sort out complex business operations. They are instead offering a legal haven to big corporations zealously protecting their profits from civil claims they harmed others.

The U.S. Constitution recognizes the fundamental right of claimants to have their cases asserting injury by others heard in trial courts, with juries.  It says so in the Seventh Amendment, part of the Bill of Rights.

But 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.’”

A nursing home chain’s bankruptcy

The pressure, however, went the wrong way when Consultate, one of the nation’s largest nursing home chains with 140 facilities nationwide, found itself barraged with lawsuits asserting its long-term care mistreated residents in a variety of negative ways, Stat, a science and medical news site, reported:

“A STAT investigation found that in many of these cases, lawyers for Consulate affiliates leveraged the threat of bankruptcy in seeking to lower settlements, and that the companies’ actions fit a larger pattern. Before bankruptcy, the company used a convoluted corporate structure that stymied litigation, including dividing up ownership of its nursing homes and keeping paltry liability insurance. Taken together, Consulate left families … with little chance of recourse for alleged wrongdoing. Such tactics, while legal, have prompted calls for holding nursing home chains more accountable, and the Biden administration has announced it will take steps to make homes’ ownership and finances more transparent. Nursing home watchdogs say the Consulate affiliates’ bankruptcy case set a troubling precedent.

“When a company files for bankruptcy, all ongoing legal actions are frozen, and plaintiffs must seek relief from the bankruptcy court. Under the bankruptcy order, which was approved last December, unsecured creditors, including the families with pending legal actions, are expected to recover only 0.7% of their claims. Charlene Harrington, professor emeritus of social and behavioral sciences at the University of California, San Francisco, said Consulate’s bankruptcy strategy and its corporate structure have proven successful in protecting itself from legal responsibility. ‘If it was just a tiny nursing home chain in Indiana no one would care,’ said Harrington … But Consulate was the sixth largest nursing home chain at the time of the bankruptcy declaration. ‘Other companies will look at how they managed bankruptcy to get out from under it.’”

Big Pharma clearly took note of how the plutocratic Sackler clan maneuvered thousands of lawsuits against the family-controlled Purdue Pharmaceutical out of the consolidated control of a federal judge in Cleveland and into a hand-picked, small bankruptcy court in White Plains, N.Y. There, the family fought to protect its personal wealth, avoid responsibility for the deaths and debilitation caused by its powerful, addictive painkiller OxyContin, and to limit any payouts.

Hard on the heels of the bankruptcy court judge allowing Purdue and the Sacklers into his jurisdiction, Johnson and Johnson followed this legal course, seeking respite for a wave of lawsuits over its iconic baby powder. J&J one-upped the Sacklers, creating a subsidiary, lumping all the talc claims into its portfolio, and then declaring its stepchild entity on its own and bankrupt. J&J itself is a pharma and medical products titan and is clearly profitable. But the subsidiary bankruptcy shields the company from sizable legal judgments that it knew its talc was tainted with cancer-causing asbestos.

Veterans angered by 3M legal tactic

Veterans who say they have suffered hearing loss and other damages due to defective earplugs made by 3M are up in arms over the manufacturer’s move to have a subsidiary absorb all potential claims and be declared bankrupt as a result, as the Wall Street Journal reported:

“Lawyers for U.S. military veterans suing 3M Co. over its earplugs are trying to block the manufacturer’s plan to resolve the yearslong liability case in bankruptcy court. Aearo Technologies LLC, a 3M subsidiary that once produced the earplugs, late last month accepted responsibility for claims of hearing loss from more than 230,000 veterans who have said they used the earplugs during their time in the military. As part of the move, Aearo absolved the Minnesota-based industrial conglomerate from liability for the earplugs.

“Aearo immediately filed for federal bankruptcy protection in Indianapolis. Bankruptcy provides corporate defendants, such as Aearo, leverage to settle mass-liability claims. Companies in chapter 11 usually can’t be sued outside of bankruptcy court. Aearo said the bankruptcy should allow it to end trials and mediation talks between 3M and the claimants that have been under way in U.S. District Court in Pensacola, Fla., since 2019. ‘The verdicts were already outsized and untethered to reality,’ Aearo said in its July 26 bankruptcy filing. Aearo said the case is now the largest product-liability civil case in the U.S.”

The company says it is prepared to pay $1 billion or more to settle the claims as part of a bankruptcy. But the vets and their legal counsel oppose this legal maneuver:

“’The court should not allow 3M to simply wipe away the litigated record of these cases to the detriment of innocent claimants because 3M is displeased with the results,’ a plaintiff’s lawyer said in a motion … The plaintiff’s filing described 3M’s pivot to bankruptcy court … as ‘gaming the system’ … The filing noted that 3M agreed to some of the procedures for processing the claims that it now objects to and has the option of appealing court decisions it doesn’t like. It said plaintiffs with claims pending in the Florida court will have to restart their cases from scratch if the claims are transferred to Aearo’s bankruptcy.”

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. They know 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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