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The Senate Judiciary Subcommittee on Federal Courts, Oversight, Agency Action and Federal Rights held a hearing yesterday titled "Abusing Chapter 11: Corporate Efforts to Side-Step Accountability Through Bankruptcy." Witnesses testifying at the hearing yesterday included Hon. Judith K. Fitzgerald of Tucker Arensberg, P.C. (Pittsburgh), Prof. David Skeel of the University of Pennsylvania Law School, Kimberly Ann Naranjo of Sandy, Utah, Paul H. Zumbro of Cravath, Swaine & Moore LLP (New York) and Kevin C. Maclay of Caplin & Drysdale (Washington, D.C.). For prepared testimony and to watch a replay of the hearing, please click here. 

In related news, an article yesterday by WSJ Pro Bankruptcy was entered into the hearing record highlighting how a handful of large, profitable corporations are using the “Texas Two-Step” strategy to access U.S. bankruptcy courts, unlocking powerful legal tools for settling thousands of asbestos lawsuits for a fraction of what juries might force these companies to pay. The new legal tactic is shifting the balance of power toward corporate defendants Johnson & Johnson, Georgia-Pacific LLC as well as U.S. units of Ireland’s Trane Technologies PLC and France’s Compagnie de Saint-Gobain SA, which have corporate affiliates accused of previously selling products that contain asbestos, a cancer-causing mineral. J&J, Georgia-Pacific, Trane and Saint-Gobain haven’t filed for bankruptcy. But they have used a Texas law to shift at least 250,000 personal-injury cases to bankruptcy court through newly created subsidiaries with limited business operations, a strategy developed by law firm Jones Day, court records show. The legal strategy will be put on trial in a New Jersey bankruptcy court later this month as personal-injury lawyers seek to dismiss the bankruptcy case filed in October by a J&J subsidiary, LTL Management LLC, to drive a settlement of roughly 38,000 cancer lawsuits over its talc-based products. Read more.

Click here to read a letter submitted to the subcommittee by law professors concerned by the “Texas 2-Step” strategy, which was recently used by Johnson & Johnson to spin off its Talc-related liabilities from the rights of its assets and to file a new shell corporation, LTL Management LLC, for chapter 11 bankruptcy. 

Members of the billionaire Sackler family that own Purdue Pharma LP are “even closer” to a deal that would increase their contribution to the OxyContin maker’s embattled opioid settlement, a court-appointed mediator said in a report yesterday, Bloomberg News reported. The family and a handful of state attorneys general who have been fighting Purdue’s opioid settlement are closing in on a deal that would provide new money on top of the $4.325 billion the company’s owners already pledged as well as “certain material non-economic terms,” U.S. Bankruptcy Judge Shelley Chapman, who is overseeing the talks, said in her report. Judge Chapman asked U.S. Bankruptcy Judge Robert Drain, who is overseeing Purdue’s bankruptcy, to extend the mediation to February 16. Purdue’s settlement would let the company resolve trillions of dollars in claims against it over its role in the opioid crisis. The accord calls for handing nearly all of the drugmaker’s assets over to the states, cities and counties suing it for its handling of OxyContin and would provide billions of dollars to anti-addiction programs. But it would also protect Purdue’s owners from future opioid lawsuits, a dynamic that has drawn the ire of some state attorneys general, politicians and personal injury victims. Attorneys general from eight states and the District of Columbia, along with an arm of the U.S. Justice Department, succeeded in overturning the settlement on appeal after Purdue’s bankruptcy judge approved it last year.

A bankruptcy judge extended Latam Airlines Group SA’s exclusive control over its chapter 11 proceedings until early March despite opposition from certain unsecured creditors who have been sidelined in the Chilean airline’s proposed capital raise, WSJ Pro Bankruptcy reported. Bankruptcy Judge James Garrity of the U.S. Bankruptcy Court in Manhattan yesterday granted a request by Latam to extend its exclusivity, while denying a competing bid by certain unsecured creditors to terminate the company’s exclusive control so that a potential alternative could be put forth. Judge Garrity said that Latam, the largest airline group in Latin America, has formulated its chapter 11 plan in good faith, taking into consideration the company’s complex operations along with sizable assets and liabilities. He said that granting this short extension will allow Latam to continue making progress toward a value-maximizing restructuring and won’t harm stakeholders in the chapter 11 cases, jointly filed by Latam and its affiliates in 2020.

The Senate Judiciary Subcommittee on Federal Courts, Oversight, Agency Action and Federal Rights to hold hearing today at 3 p.m. ET titled "Abusing Chapter 11: Corporate Efforts to Side-Step Accountability Through Bankruptcy." The witness list includes Hon. Judith K. Fitzgerald of Tucker Arensberg, P.C. (Pittsburgh), Prof. David Skeel of the University of Pennsylvania Law School, Kimberly Ann Naranjo of Sandy, Utah, Paul H. Zumbro of Cravath, Swaine & Moore LLP (New York) and Kevin C. Maclay of Caplin & Drysdale (Washington, D.C.). For more information and to watch a live webcast of the hearing, please click here. 

Click here to read a letter submitted to the subcommittee by law professors concerned by the “Texas 2-Step” strategy, which was recently used by Johnson & Johnson to spin off its Talc-related liabilities from the rights of its assets and to file a new shell corporation, LTL Management LLC, for chapter 11 bankruptcy. 

The U.S. Department of Justice's bankruptcy watchdog objected on Monday to the Boy Scouts of America's proposed reorganization plan and underlying $2.7 billion sex-abuse settlement, saying it provides impermissible legal protections to insurers and the bankrupt youth organization's local councils, among others, Reuters reported. The U.S. Trustee said in a court filing that the nondebtor releases provided to insurers and others, which have not filed for chapter 11, in exchange for contributions to the settlement are not authorized by bankruptcy law. "The plan lacks even a cursory discussion of why the non-debtor releases are necessary," the U.S. Trustee said yesterday's filing, while also noting the releases were so broadly written it was not clear who was covered by them. BSA filed for bankruptcy in February 2020 to resolve allegations by former Scouts spanning decades that they were abused by troop leaders as children. Since then, more than 82,000 abuse claims have been filed in the bankruptcy. The plan aims to resolve all of those claims through the $2.7 billion settlement, which will be funded by insurers, local councils (which are independent legal entities), and BSA itself, among others. Insurers, local councils, committees that represent abuse survivors, current and former BSA officers and employees, and organizations that chartered Scouting units and activities will be among those covered by the nondebtor releases. Anyone who personally committed or was alleged to have committed abuse is not protected.

The opposing sides in the Archdiocese of Santa Fe bankruptcy case are battling over whether certain insurance records should be sealed from public view, the Santa Fe New Mexican reported. Insurance coverage for the archdiocese is a key issue in the effort by victims and the church to reach an agreement in the case that involves more than 400 victims of clergy sexual abuse, most of them children. The chapter 11 bankruptcy case has dragged on for more than three years, and insurance coverage is expected to pay a big chunk of the undisclosed amount of money needed to settle. A Santa Fe attorney who represents several victims objected to confidentiality and sealing of records, contending in an interview yesterday that secrecy is what led to the tragedy of widespread priest abuse of children in the first place. “We’re here because of secrets that have been kept for years and years,” said attorney Merit Bennett. He said the request to seal documents amounts to “going backward in time. It needs to all be transparent.” He said that priests got away with molesting children for decades in part because they held community members’ secrets from the confessional and people were afraid to challenge them. Besides insurance coverage, the archdiocese has sought donations, sold some properties and held an online auction of small properties that ended yesterday. It was the second such auction. The first brought in about $1.4 million, likely a small fraction of the amount needed for a settlement.

Johnson & Johnson tried to get a U.S. judge to block Reuters from publishing a story based on what it said were confidential company documents about the healthcare giant's legal maneuvers to fight lawsuits claiming its Baby Powder caused cancer. "The First Amendment is not a license to knowingly violate the law," said the company in a filing late Thursday in U.S. Bankruptcy Court in New Jersey, where a unit of J&J had sought bankruptcy protection while defending the Baby Powder lawsuits. The First Amendment of the U.S. Constitution protects freedom of the press. On Friday, Reuters reported that J&J secretly launched "Project Plato" last year to shift liability from about 38,000 pending Baby Powder talc lawsuits to a newly created subsidiary, which was then to be put into bankruptcy. By doing so, J&J could limit its financial exposure to the lawsuits. After the publication of the story, Reuters asked U.S. Bankruptcy Judge Michael Kaplan to deny J&J's motion, claiming it was moot. Less than an hour after Reuters submitted its letter, J&J said in a filing that it was withdrawing a request for an immediate hearing on the matter but was "not prepared to agree" that its request regarding the documents was moot. J&J said in its filing after the publication of the story that it intends to continue discussions with Reuters and said it was "heartened that publication of confidential documents may no longer be imminent." J&J's request to block publication was "among the most extraordinary remedies a litigant can request under the law," attorneys for Reuters, a unit of Thomson Reuters, said in a Friday court filing. The news agency's lawyers called J&J's request a "prior restraint of speech on a matter of public interest." J&J said Reuters had obtained documents that were protected from public disclosure by an order from Judge Kaplan. The company demanded that Reuters return the documents and refrain from publishing information gleaned from the documents. Reuters denied that it has confidential information, saying in court papers that the confidentiality of one of the documents was lifted in January and that the second is not in the possession of Reuters.

Pharmaceutical company Mallinckrodt PLC on Thursday won court approval of its reorganization plan, which includes a $1.7 billion settlement of opioid-related litigation, bringing its 16-month bankruptcy close to an end, Reuters reported. Bankruptcy Judge John Dorsey in Wilmington, Del., signed off on the plan in a 103-page written decision. In addition to settling thousands of lawsuits accusing it of deceptively marketing its opioids, the plan allows Mallinckrodt to reduce $5.3 billion in debt by $1.3 billion and hands control of the reorganized company to creditors. Mallinckrodt filed for bankruptcy in October 2020 to resolve more than 3,000 lawsuits from states, local governments and private individuals who accused the company of fueling the opioid epidemic through deceptive marketing, including by playing down the risks of addiction and abuse. The company won the support of committees representing junior creditors and opioid claimants, which had long opposed the plan, for the deal in September. Nearly all U.S. states backed it as well. In approving the plan, Judge Dorsey overruled objections raised by the state of Rhode Island, pharmaceutical company Sanofi, certain insurers and shareholders.

Johnson & Johnson yesterday accused attorneys for people who have sued the pharmaceutical giant over its talc products of sharing confidential documents with Reuters in what it called a “calculated effort” to try its subsidiary’s bankruptcy case in the press, Reuters reported. In a letter filed with the U.S. Bankruptcy Court in New Jersey, attorneys for J&J and LTL Management LLC, a bankrupt subsidiary that the company set up to hold its talc liabilities, claimed that lawyers for two committees representing plaintiffs shared at least two confidential documents with the news organization. Lawyers for the plaintiffs’ committees engaged in a “calculated effort” to “try this case in the press rather than in the court,” LTL attorney Gregory Gordon said in a court hearing shortly after the letter was filed. “Counsel for the committees, apparently, are feeding documents to the press. And we’re specifically aware it’s being done with Reuters,” Gordon said. The J&J lawyers said that the documents it said were leaked were subject to a protective order issued by U.S. Bankruptcy Judge Michael Kaplan. The letter asks Reuters to return the documents it said were leaked and to refrain from disclosing any confidential information they contain. J&J’s lawyers said that if Reuters declined, they would consider petitioning the court to compel the news organization to do so. A Reuters spokesperson called the claims without merit. Read more. 

In related news, law professors opposed to Johnson & Johnson’s baby powder bankruptcy can help opponents of the company make legal arguments against the controversial chapter 11 case, a judge ruled, Bloomberg Law reported. Bankruptcy Judge Michael B. Kaplan agreed to accept a series of legal papers attacking J&J’s decision to put a unit into bankruptcy as a way of resolving lawsuits filed by more than 38,000 people who claim they were harmed by tainted talc in baby powder. Kaplan is scheduled to hold a trial later this month of whether to dismiss the bankruptcy case as requested by lawyers for the talc victims. Read more. (Subscription required.) 

A committee representing consumers suing Johnson & Johnson over its talcum-based baby powder products is challenging a bid to use bankruptcy to freeze litigation against the company and retailers that sold the product, WSJ Pro Bankruptcy reported. The committee, which represents consumers who allege exposure to J&J’s talcum products caused cancer, said in a court filing on Tuesday in the U.S. Bankruptcy Court in Trenton, N.J., that pausing civil lawsuits against J&J, which is not in bankruptcy, could prevent tens of thousands of people dying from ovarian cancer and mesothelioma from having their day in court. J&J faces about 38,000 talc-injury cases that alleged talc-based Johnson’s Baby Powder contained asbestos, a cancer-causing mineral, an allegation J&J has denied. The consumer goods giant moved the talc-injury cases to bankruptcy court last year through a newly formed subsidiary, which filed for chapter 11 in October. J&J stopped selling talcum powder-based products in the U.S. and Canada in 2020 and has maintained that the powder is safe and doesn’t contain asbestos.