Bankruptcy Process Needs to Remain Fair for All

The Senate Judiciary Committee recently held a hearing examining how lawsuits are treated in the bankruptcy process — the second time Congress has addressed the issue in recent months.

No doubt, some members believed the hue and cry that the bankruptcy process isn’t fair and that reforms, endorsed by plaintiffs’ lawyers, are needed to exempt some lawsuits from the bankruptcy process.

The hearing played out against the backdrop of the high-profile Purdue Pharma restructuring and last year’s announcement by Johnson & Johnson that it would place a subsidiary, including its liability for tens of thousands of talcum powder claims, into bankruptcy. Johnson & Johnson made that decision despite winning talc cases in reliably pro-plaintiff jurisdictions — St. Louis, Philadelphia and St. Clair County, Illinois.

During the hearing, Senator Sheldon Whitehouse (D-Rhode Island) identified defendants’ choice of the venue in these matters as a central concern in bankruptcy, stating that “outcomes in court should not be determined by strategic forum shopping.” Of course, it is always the case that the party that initiates a case is the one that determines the court in which to bring it. Rather than limit his focus to bankruptcy, Senator Whitehouse and his colleagues should address the broader issue of “venue” reform to combat some of the most urgent problems in all aspects of the civil justice system.

Plaintiffs’ lawyers utilize what the American Tort Reform Association believes is inappropriate “forum shopping” to bring their cases in plaintiff-friendly jurisdictions where high-dollar awards, low evidentiary standards, and low barriers of entry are the norm. Many of the most egregious abuses of the civil justice system have occurred when plaintiffs’ lawyers have been allowed to bring their cases in plaintiff-friendly courts that have no real connection to the case at hand.

Congress should tackle these abuses that too often leave companies with little or no alternative to bankruptcy. Their priority should be taking the steps necessary to keep companies out of these proceedings in the first place.

Congress also should use its oversight and legislative authority, as it did when it reformed class actions, to crack down on plaintiffs’ forum shopping and personal injury lawyers who run mass tort “lawsuit mills,” filing claims based on junk science. This is possible while still preserving the rights of the legitimately injured to be fairly compensated.

What went unstated in the recent Congressional hearing is plaintiffs’ lawyers’ distaste for defendants who choose bankruptcy. The typical attorneys’ fees in a civil case — which can be one-third or more of any settlement or judgment — are often slashed in the bankruptcy process since claims are simply paid, without the need for full-blown litigation. Moreover, the funds approved in bankruptcy to pay legal claims create a level playing field for all claimants, whereas litigation often results in a “race to the courthouse,” in which some may receive windfalls while others may fare poorly.

Earlier this month, the plaintiffs’ lawyers involved in the Johnson & Johnson talc litigation allegedly provided documents to the media related to the ongoing litigation. Media reports on this matter coupled with the Congressional hearing appear to be part of a concerted effort to cast public doubt over the fairness of the process and force the talc litigation back into civil court.

For companies that enter bankruptcy, the process is fair, and it works. Creditors and debtors work out a plan under the supervision of a bankruptcy judge. Lawsuits are generally handled in bankruptcy by creating a special fund to pay plaintiffs equitably within the bankruptcy as well as related litigation. Then, only after an overwhelming percentage of creditors vote to approve a plan, is it generally approved by a bankruptcy judge.

Congress must prioritize national interests over the profit motives of plaintiffs’ lawyers and address the real issues driving the bankruptcy process. Enacting needed reforms to address the abuses in mass torts litigation will go a long way toward improving the system and creating a more fair and balanced playing field for all.