ATRA Reiterates Support for Chapter 11 Bankruptcy Use to Address Mass Tort Litigation, Urges Meaningful Dialogue Amid Senate Judiciary Committee Hearing
Congress Must Prioritize National Interest over Lawyers’ Profit Motives
Congress must prioritize national interests over the profit motives of plaintiffs’ lawyers and address the real issue driving the bankruptcy process.
This week, the House Judiciary Committee is scheduled to hold a hearing that will examine the treatment of lawsuits in the bankruptcy process. There is a great 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.
This process is playing out in real time as Johnson & Johnson just announced it is placing a subsidiary that includes its liability for tens of thousands of talcum powder claims into bankruptcy. The news comes despite three recent defense verdicts in talc cases in usually pro-plaintiff jurisdictions- St. Louis, Philadelphia and St. Clair County, Illinois.
Those who want change in the bankruptcy process have misdiagnosed the problem and are seeking the wrong solution. Companies enter bankruptcy for all sorts of reasons. And businesses continue to struggle as we emerge from a once-in-a century pandemic. If Congress really wants to address the actual problem, then it should curb the mass tort litigation abuses that have actually driven too many companies into bankruptcy in the first place.
Most recently, problems have centered on a little-known process known as multidistrict litigation — or MDL for short — used by the federal courts to efficiently consolidate some lawsuits and save time.
Some plaintiffs’ lawyers have hijacked this system. After spending countless millions of dollars in advertising to recruit claimants, they flood the MDL process with tens of thousands of dubious claims, knowing that it’s next to impossible for judges – or the defendants – to sort through and check them all. They file claims based on junk science, or without determining that the plaintiffs are even really injured at all! One must look no further than the talcum powder MDL to see these types of abuses. It’s a big problem; MDL lawsuits are now about 40 percent of all federal court cases. As two law professors noted in a recent article, “MDL’s gravitational pull over thousands of cases demolishes all of the normal expectations of individual process and federalism.”
Once tens of thousands of cases are flied, and without the protections that MDLs “demolish,” it’s often game over. It’s impossible to bring that many cases to trial, so MDL defendants are faced with two unappealing options: settle for a king’s ransom or declare bankruptcy.
For companies that enter bankruptcy, regardless of the reason, the process is fair, and it works. Creditors (those owed money) and debtors (those owing money) work out a plan under the supervision of a bankruptcy judge. Lawsuits are generally handled in bankruptcy by creating a special fund to equitably pay plaintiffs in the bankruptcy and in related litigation. Then, only after an overwhelming percentage of creditors approve a plan is it generally OK’d by a bankruptcy judge. Companies like GM, Chrysler, and United Airlines, for example, have gone through this process and successfully emerged from bankruptcy. Other companies are less fortunate, and their assets are liquidated to pay creditors. We’ve all seen those “going out of business” ads on late night TV
Plaintiffs’ lawyers don’t like it when defendants choose bankruptcy. Their fees — generally around a third of any settlement or judgment — can often get slashed in the bankruptcy process since claims are simply paid, without the need for 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.
And that’s really the issue behind what Congress is considering. Rather than tackle abuses in the civil justice system that can unjustly push companies and nonprofits into bankruptcy, some in Congress instead want to change bankruptcy laws to reward personal injury lawyers with special treatment and give them extra leverage in the creditor-debtor negotiating process.
That’s the wrong approach, especially in a fragile economy. Congress should focus on keeping companies out of bankruptcy in the first place. It can use its oversight and lawmaking authority, as it did when it reformed class actions, to crack down on personal injury lawyers who run mass tort “lawsuit mills” and file claims based on junk science, while preserving the rights of the legitimately injured to be fairly compensated.
Reforming our civil justice system can directly impact the health of our nation’s economy. Excessive tort costs eliminate more than 2.2 million jobs across the country and wipe out an estimated $435.6 billion in overall economic activity. This is equivalent to 2 percent of the overall U.S. economy. Additionally, the federal government lost $29.5 billion in tax revenue due to excessive costs of lawsuit abuse.
Congress must prioritize national interests over the profit motives of plaintiffs’ lawyers and address the real issue driving the bankruptcy process. Enacting needed reforms to address the abuses in mass torts litigation will go a long way in improving the system and creating a more fair and balanced playing field for all.
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