Third Circuit Can Uphold Reasonable Use of ‘Texas-Two-Step’ Law

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This op-ed was originally published by Real Clear Policy. Historically, courts have respected the view that filing for bankruptcy is a well-recognized way for a business to respond when the […]

This op-ed was originally published by Real Clear Policy.

Historically, courts have respected the view that filing for bankruptcy is a well-recognized way for a business to respond when the claims of creditors, including those bringing lawsuits, threaten the viability of that business. This is especially true in cases of mass tort liability. The bankruptcy process provides a fair and efficient way to resolve both current and future claims. 

Plaintiffs’ lawyers are aggressively pushing the message that the bankruptcy process isn’t fair, and reforms are needed to exempt some lawsuits from the bankruptcy process. Why the opposition? The simple fact is that trial lawyers often benefit from the worst abuses of our legal system. They want to generate as much leverage for themselves as possible, and bankruptcy court stands in their way. Their motivation is largely self-serving: plaintiffs’ lawyers stand to earn millions of dollars in attorneys’ fees should mass tort litigation be allowed to continue.  

This fight is playing out in real time in LTL Management’s bankruptcy process. In late 2021, Johnson & Johnson placed LTL Management, a subsidiary that includes its liability for tens of thousands of talcum powder claims, into bankruptcy. Unsurprisingly, this move was immediately met with fierce challenges by the plaintiffs’ bar. Despite the strong push back, this past February Chief Judge Michael Kaplan, U.S. Bankruptcy Judge for the District of New Jersey, denied a motion to dismiss LTL’s bankruptcy proceedings and allegations that LTL’s Chapter 11 bankruptcy filing was made in bad faith, thus allowing it to continue.  

This decision is now on appeal to the Third Circuit Court of Appeals with oral arguments scheduled for mid-September. My organization, the American Tort Reform Association, alongside the U.S. Chamber Litigation Center, filed an amicus brief before the court in support of LTL’s Chapter 11 filing and urging the court to reject overtures for dismissal by opposing lawyers. If successful, the bankruptcy process will facilitate the resolution of countless claims that otherwise would have been nearly impossible to resolve. LTL’s restructuring provides an equitable outcome for all claimants—both current and future. It will prevent a “race to the courthouse” in which some may receive windfalls while others may fare poorly.  

Rather than restrict the bankruptcy process, focus should shift to addressing the litigation abuses that have forced many businesses to enter bankruptcy in the first place. Recent problems have centered on a little-known process known as multidistrict litigation — or MDL for short — used by the federal courts to consolidate some lawsuits as a matter of judicial efficiency.  

Some plaintiffs’ lawyers, however, have hijacked this system. After spending countless millions of dollars on advertising to recruit claimants, they flood the MDL process with tens of thousands of dubious claims, knowing that it is 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 need look no further than the talcum powder MDL to see these types of abuses. It is 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 filed, and without the protections that MDLs “demolish,” it is often game over for a defendant. It is 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. 

The bankruptcy process is one that seeks to balance the interests of all creditors and debtors. For companies that enter bankruptcy, regardless of the reason, the process is fair and has been proven to work for all parties involved. 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 equitably pay plaintiffs in the bankruptcy and in related litigation. Then, only after an overwhelming percentage of creditors approve a plan is it generally accepted 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.  

The bottom line is that fairness for all parties matters – not the interests of plaintiffs’ lawyers paid on a contingency fee. Now more than ever, courts around the country must balance the scales and ensure that businesses can get the fair shake they deserve from our civil justice system–for the sake of our economy, and most of all, justice.

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