Bankruptcy: New Opium for the Masses ... of Tort Defendants

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The proposed Purdue bankruptcy plan has its champions and its detractors. Many bemoan usurping the victim’s rights to confront the bankruptcy debtor. Others see bankruptcy as a chance to provide some compensation to those injured in a rapid and streamlined fashion, guaranteeing recovery funds are available while allowing the concern to continue operating, providing an orderly resolution so that business might continue, preserving jobs and some revenue.  

The bankruptcy system proves a centralized proceeding for resolving claims, determining the company’s financial status before aggregating all claims in a common forum.  

Financially distressed companies often seek refuge in federal bankruptcy court to auction valuable assets and pay creditor claims.

Professor Samir D. Parikh, Lewis & Clark Law School

Arriving at the currently proposed Purdue settlement has been long, arduous, and beset with obstacles, but these seem to have been addressed now.  The current version is still awaiting judicial approval, but at this point, this seems likely.

The prior version, supported by many, was nixed by Judge Colleen McMahon, who lamented that the arrangement did not address bankruptcy issues that have vexed the courts for the last 35 years. Among these issues is the blatant unfairness to victims – one of which is their chance to confront the wrongdoer.

Experimental work has been done in medical malpractice settlements where cases are settled (avoiding a costly trial and the possibility of a plaintiff loss) after the physician “confesses,” apologizes, expresses remorse, regret, or repents, explains what went wrong, and requests forgiveness. Some assert that this is missing – and what is wrong – with the newfangled bankruptcy practice -the opportunity for confrontation between the alleged wrongdoer and the wronged. Here, it is the Sacklers, who once owned Purdue, that the victims seek to confront.

The victim’s need to get their story out has been partially addressed. A few weeks ago, Bankruptcy Court judge, Shelly Chapman, remedied that obstacle by allowing 26 potential claimants and survivors to tell their stories.

I think far more is at stake.

Who would ever believe the Sacklers are genuinely regretful of the money they squeezed from the nerve-endings of the suffering?  If an apology were forthcoming, wouldn’t it be a sham? Trying to elicit an honest and meaningful apology from business owners who carefully evaluated the business pros and cons of questionable marketing strategy is rather delusional, wouldn’t you say?

In fact, the Sacklers – who seek protection from lawsuits under bankruptcy laws - have never declared bankruptcy. Yet, they are manipulating the plan and calling the shots on the settlement.

So, how could this be?

Asbestos Births a New Practice

A new bankruptcy practice began with the asbestos cases, for which the law was amended. There, the “class” of claimants was inchoate. Not only were current claimants lining up, clogging the tort system, but because asbestos causes latent diseases, many which had not yet manifested, a new class of future claimants was sure to arise, along with “the worried well” who sought medical monitoring.

The “trust fund,” therefore, had to be amply large and the money-spigot open to allow continuous funding to compensate both present and future plaintiffs. Potential contributors needed to be induced to fund the pot – hence the offer of liability releases to allied (non-debtor) participants who had not declared bankruptcy.

Thus, the corralling of assets from related parties not invoking bankruptcy status was born, channeling them into the trust fund to compensate claimants in exchange for its legal protection from direct claims. There, it made lots of sense.

But these provisions have now spawned what Legal Scholar Lindsey Simon calls bankruptcy grifters.

“Savvy defendants, like the Sackler’s, Honda, Wal-Mart … have found a way to get … [bankruptcy] relief without filing Chapter 11, offering money to claimants and [are]  threatening to implode settlements unless they receive … releases in bankruptcy court.”

Grifters

Bankruptcy grifters are the aiders and abettors related to a mass tort bankruptcy defendant. These include insurance companies, distributors, and related companies, who take advantage of Bankruptcy’s Chapter 11 procedures, releasing them from personal liability without filing for bankruptcy.  They are then protected from claims from hundreds of thousands of victims, government agencies, and entities, as claimants are restricted to recovery from the trust - assets collected into a single pot via a “channeling injunction.”

According to Professor Simon, the Sacklers are a prime example of bankruptcy grifting, i.e., “latching on to others for benefits they do not deserve.”   They even want liability protection for civil claims of fraud, misrepresentation, and willful misconduct, even after admitting to the same in criminal actions.

The newest and latest iteration of the deal increases the amount the Sacklers contribute to six billion (still to be approved by the bankruptcy judge) and requires the Sacklers to apologize – in exchange for protection from civil lawsuits. Practically speaking, their financial contribution allows monies to help people and communities who would go without or with delayed recovery if the bankruptcy plan is not approved.

Now approved by the eight states and the District of Columbia, who opposed the prior settlement and brought the currently pending appeal, this new deal seems likely to go through.

Given that there is no measure of sincerity of apologies, I say the Sacklers come out ahead. Even if it means they must tolerate the victims having a forum to berate them (no mention if the family needs to be in court at the time), they can simply stuff cotton in their ears for a few hours.

So, is it good enough?

Insult on top of Ignominy:

Generally, bankruptcy requires the complete discovery of assets. Not having declared bankruptcy themselves, the grifters benefit from not having to suffer the ignominy of revealing their assets. True, the Sacklers supposedly produced millions of pages of financial documents, creating a documentary tsunami exposing hidden assets: A billion dollars was transferred reportedly using Swiss bank accounts by simple wire transfer. And between 2008 and 2018, the Sacklers withdrew ten billion dollars from the company, which ordinarily might face claw-back actions.

Given the amount they’ve grifted, some maintain that their six billion dollar contribution is not sufficient. But again, without their contribution – no funds for the victims.

So what’s to be done with the social parasites and sociopaths glomming on to bankruptcy protection?

The Scarlet-Lettered Bankruptcy

One legal scholar proposed that those falling under this pied piper school of bankruptcy where everyone connected follow the bankrupt – like those related to Johnson & Johnson’s talc subsidiary or pharmacies in a drug supply chain or cellphone manufacturers allegedly obscuring risks of extended wireless products -- be corralled under the umbrella of ”Scarlet-Letter” bankruptcies. Professor Samir Parikh proposes that instead of immediately winding down the bankrupt company, it be reorganized into a “public-benefit” company, whose purpose is to help the public and whose proceeds can then be augmented to better compensate the victims.

Something like this is already being proposed for the Purdue matter. The new deal calls for members of the Sackler family to give up control of the family-based company so it can be turned into a new entity with profits used to fight the crisis.

As noted above, the new deal still must be approved by the court. And from what I can tell, it still doesn’t address reservations articulated by Judge McMahon’s earlier decision. She’s against the non-debtor bailout – regardless of the practicalities (aka, loopholes created by the rich even if it benefits the victims). Although couched on procedural grounds, I read from her decision to say that she’s against giving the Sacklers their prize – further release from liability. This issue of giving non-debtors immunity is a question she says has been plaguing courts for decades and needs appellate resolution.

Although the new plan assuages the victim's need to be ­heard and provides more money, addressing tort law’s compensatory purpose, the new proposal ignores one key element of tort law: the deterrence function.

When businesses do monstrous deeds and are punished (via large punitive damages not covered by insurance), public shame deters similar conduct in others - at least for a time. And while bankruptcy law provides for discovery - which theoretically could be extended to cover the non-debtor grifters, that discovery only pertains to financial disclosures. What about the misdeeds? Do we get to hear, in all the gory detail, how mercenary, venal, greedy, a grifter or debtor was, ignoring the victim's plight at the expense of the almighty pocket? Those heinous deeds are buried under the umbrella of legal protection. And exposing those deeds by a few well-publicized, high-profile trials, replete with heavy punitive damages not covered by insurance, might deter others.

In the meantime, now that the objections to the appeal have been mollified, it looks like the Second Circuit won’t get a chance to review this vexing issue, and the Sacklers may well get their way.