Due Process Alignment in Mass Restructurings
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates, Chapter 11, Mass Torts | 0

By Sergio J. Campos (University of Miami School of Law) and Samir D. Parikh (Lewis & Clark Law School)

Sergio J. Campos
Samir D. Parikh

Mass tort defendants have recently begun exiting multi-district litigation (MDL) by filing for bankruptcy. This new strategy ushers defendants into a far more hospitable forum that offers accelerated resolution of all state and federal claims held by both current and future victims.

Bankruptcy’s resolution promise is alluring, but the process relies on a very large assumption: future claimants can be compelled to relinquish property rights – their cause of action against the corporate defendant – without consent or notice. Bankruptcy builds an entire resolution structure on the premise that the Bankruptcy Code’s untested interest representation scheme satisfies Due Process strictures. This Article questions that assumption, and identifies two compromised pillars. Primarily, the process for selecting the fiduciary that represents future victims’ interests (FCR) is broken. Further, the process by which courts estimate the value of thousands of mass tort claims places too much pressure on a jurist unfamiliar with personal injury claims. These compromised pillars raise the risk that the settlement trust will be underfunded and fail prematurely. In this outcome, future victims would have no recourse but to argue that the process did not satisfy Due Process, and the settlement should be unwound.

This Article proposes that the risk of a prematurely insolvent victims’ trust can be reduced considerably by making two adjustments. Our proposal seeks to (i) rebuild the FCR construct in order to ensure that future victims’ interests are effectively represented, and (ii) recalibrate the claim estimation process by facilitating coordination between the bankruptcy court and nonbankruptcy trial courts.

The full article is forthcoming in the Fordham Law Review and is available here.

 

Scarlet-Lettered Bankruptcy: A Public Benefit Proposal for Mass Tort Villains
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates, Corporate Governance, Reorganization | 0

By Samir D. Parikh (Lewis & Clark Law School)

Samir D. Parikh

Financially distressed companies often seek refuge in federal bankruptcy court to auction valuable assets and pay creditor claims. Mass tort defendants – including Purdue Pharma, Johnson & Johnson, Boy Scouts of America, and USA Gymnastics – introduce new complexities to customary chapter 11 dynamics. Many mass tort defendants engage in criminality that inflicts widescale harm. These debtors fuel public scorn and earn a scarlet letter that can ultimately destroy the value of an otherwise profitable business. Scarlet-lettered companies could file for bankruptcy and quickly sell their assets to fund victims’ settlement trusts. This Article argues, however, that this traditional resolution option would eviscerate victim recoveries. Harsh public scrutiny has diminished the value of the resources necessary to satisfy claims, creating a discount that must be borne by victims.

My public benefit proposal charts a new course. Instead of accepting fire sale prices and an underfunded settlement trust, the scarlet-lettered company emerges from bankruptcy as a corporation for the public benefit. This modified reorganization offers victims the greatest recovery. The continued operation preserves value during a transition period, after which the going concern can be sold efficiently. Further, assets that have been tainted by corporate criminality are cleansed behind a philanthropy shield and sold to capture the value rebound. The victims’ collective is the owner of the new company and can participate in a shareholder windfall if the reorganized company experiences strong post-bankruptcy performance.

At the forefront of a new trend in aggregate litigation, this Article proposes a public benefit alternative to traditional resolution mechanisms. This approach delivers utility that will support application in a variety of contexts, assuming certain governance safeguards are maintained. In our new age of greater personal and corporate accountability, more scarlet-lettered companies will emerge and ultimately land in bankruptcy. The need to address the disposition of tainted assets will be paramount in compensating mass tort victims trying to reassemble fractured pieces. This Article explains a new phenomenon and reconceptualizes resolution dynamics in a way that will have policy implications that transcend aggregate litigation.

The full article will be available at 117 Nw. U. L. Rev. ___ (forthcoming 2022) and can be accessed here.

Mass Exploitation
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates | 0

By Samir D. Parikh (Lewis & Clark Law School; Fulbright Schuman Scholar; Bloomberg Law; Fulbright Commission)

Samir D. Parikh

Modern mass tort defendants – including Johnson & Johnson, Purdue Pharma, USA Gymnastics, and Boy Scouts of America – have developed unprecedented techniques for resolving mass tort cases; innovation coupled with exploitation. Three weapons in this new arsenal are particularly noteworthy. Before a filing, divisive mergers allow corporate defendants to access bankruptcy on their terms. Once in bankruptcy, these mass restructuring debtors curate advantageous provisions in the Bankruptcy Code to craft their own ad hoc resolution mechanism implemented through plans of reorganization. This maneuver facilitates various questionable outcomes, including the third-party releases the Sackler family recently secured. Finally, in order to minimize its financial contribution to a victims’ settlement trust, a mass restructuring debtor can agree to convert its tainted business into a public benefit company after bankruptcy and devote future profits – no matter how speculative they may be – to victims.

The net effect of these legal innovations is difficult to assess because the intricacies are not fully understood. Debtors argue that these resolution devices provide accelerated and amplified distributions. And forum shopping has landed cases before accommodating jurists willing to tolerate unorthodoxy. The fear, however, is that mass tort victims are being exploited. The aggregation of these maneuvers may allow culpable parties to sequester funds outside of the bankruptcy court’s purview and then rely on statutory loopholes to suppress victim recoveries.  Mass restructuring debtors are also pursuing victim balkanization – an attempt to pit current victims against future victims in order to facilitate settlements that may actually create disparate treatment across victim classes.

This Essay is the first to identify and assess the new shadowed practices in mass restructuring cases, providing perspective on interdisciplinary dynamics that have eluded academics and policymakers. This is one of the most controversial legal issues in the country today, but there is scant scholarship exploring improvement of the flawed machinery. This Essay seeks to create a dialogue to explore whether a legislative or statutory response is necessary and what shape such a response could take.

The full article will be available at 170 U. Pa. L. Rev. Online ___ (forthcoming 2021) and can be accessed here.

The New Mass Torts Bargain
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates | 0

By Samir D. Parikh (Lewis & Clark Law School)

Samir D. Parikh

Mass torts create a unique scale of harm and liabilities. Corporate tortfeasors are desperate to settle claims but condition settlement upon resolution of substantially all claims at a known price—commonly referred to as a global settlement. Without this, corporate tortfeasors are willing to continue with protracted and fragmented litigation across jurisdictions. Global settlements can be elusive in these cases. Mass torts are oftentimes characterized by non-homogenous victim groups that include both current victims and unknown, future victims—individuals whose harm has not yet manifested and may not do so for years. Despite this incongruence, the claims of these future victims must be aggregated as part of any global settlement. This is the tragedy of the mass tort anticommons: without unanimity, victim groups are unable to access settlement resources in a timely or meaningful way, but actual coordination across the group can be impossible.

Current resolution structures have proven ill-equipped to efficiently and equitably address the novel challenges posed by mass torts. Many cases cannot satisfy Rule 23’s requirements for class action certification. Multidistrict litigation is the most frequently invoked resolution structure, but the MDL process is distorted. The process was initially designed for one district court to streamline pretrial procedures before remanding cases for adjudication. Instead, MDL courts have turned into captive settlement negotiations. In response, a new strategy for resolving modern mass torts has emerged. Corporate tortfeasors—including Purdue Pharma, Boy Scouts of America, and USA Gymnastics—have started filing for bankruptcy. These mass restructurings automatically halt the affected MDL cases and transfer proceedings to a bankruptcy court—a process I describe as bankruptcy preemption. Unfortunately, bankruptcy preemption replaces one deficient structure with another. Mass restructuring debtors are exploiting statutory gaps in the bankruptcy code in order to bind victims through an unpredictable, ad hoc structure. The new bargain creates myriad risks, including insolvent settlement trusts and disparate treatment across victim classes.

This Article is the first to attempt a reconceptualization of how modern mass torts should be resolved and delivers an unprecedented normative construct focused on addressing anticommons dynamics through statutory amendments to the Bankruptcy Code. These changes, coupled with an evolved perspective on fundamental structural anomalies, are designed to improve predictability, efficiency, and victim recoveries. More broadly, this Article attempts to animate scholarly debate of this new, non-class aggregate litigation strategy that will reshape the field.

The full article is available here.

Bankruptcy Tourism and the European Union’s Corporate Restructuring Quandary: The Cathedral in Another Light
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, International and Comparative | 0

By Samir D. Parikh (Lewis & Clark Law School)

Samir D. Parikh

For the last decade, the European Union has been reconceptualizing its corporate restructuring framework with the hope of bolstering capital markets and improving cross-border lending. Unfortunately, the system remains plagued by two intractable problems: divergent substantive law at the Member State level and jurists unaccustomed to guiding reorganization cases. The result is a system beset by uncertainty and disparate treatment. The EU is intent on addressing these problems, but progress has been elusive. The EU must work through recommendations and directives to encourage Member States to align substantive restructuring law with policy design. But Member States have been unresponsive to the EU’s recent efforts. The prospect of addressing these intractable problems in the foreseeable future is grim. Therefore, this Article breaks with current scholarship and urges the EU to adopt a radical alternative. The EU should consider making legal and structural changes that will facilitate bankruptcy tourism. I argue that affording corporations increased discretion as to the location of restructuring cases will aid in creating judicial hubs of optimal law and experienced jurists. The EU has the power to adopt my recommendations by simply modifying its own law and procedure, which should accelerate implementation timelines.

Ultimately, economists foresee an impending financial correction. The EU’s restructuring framework is unprepared to offer predictable and comprehensive reorganization outcomes for the next wave of distressed corporations. This Article proposes a novel vantage point from which to assess policy alignment.

For previous Roundtable posts on for bankruptcy tourism, see Wolf-Georg Ringe, “Bankruptcy Forum Shopping in Europe.”

The full article is available here. Forthcoming in the University of Pennsylvania Journal of International Law.

Falling Cities and the Red Queen Phenomenon
by | posted in: Municipal Bankruptcy | 0

By Samir D. Parikh (Lewis and Clark Law School) and Zhaochen He (Lewis and Clark College)

Cities and counties are failing.  Unfunded liabilities for retirees’ healthcare benefits aggregate to more than $1 trillion.  Pension systems are underfunded by as much as $4.4 trillion.  Many local government capital structures ensure rising costs and declining revenues, the precursors to service-delivery insolvency.  These governments are experiencing the Red Queen phenomenon.   They have tried a dizzying number of remedies but their dire situation persists unchanged.  Structural changes are necessary, but state legislatures have failed to respond.  More specifically, many states have refused to implement meaningful debt restructuring mechanisms for local governments. They argue that giving cities and counties the power to potentially impair bond obligations will lead to a doomsday scenario: credit markets will respond by dramatically raising interest rates on new municipal and state bond issuances. This argument – which we term the paralysis justification – has been employed widely to support state inaction.  But the paralysis justification is anecdotal and untested.

This article attempts to fill a significant gap in the literature by reporting the results of an unprecedented empirical study. Our study aggregates data for every general obligation, fixed-rate municipal bond issued in the U.S. from January 1, 2004 to December 31, 2014, over 800,000 issuances in total.  By employing multivariate regression analysis, we are able to conclude that the paralysis justification is a false narrative.  Municipalities located in states that offer meaningful debt restructuring options enjoy the lowest borrowing costs, all other things equal.  This article removes one of the largest obstacles to financial relief for many cities and counties. We hope to encourage recalcitrant state legislatures to enact the structural changes their local governments need desperately.

The full article is available here.

A New Fulcrum Point for City Survival
by | posted in: Municipal Bankruptcy | 0

By Samir D. Parikh, Lewis & Clark Law School

ParikhMunicipalities face daunting fiscal challenges that threaten debt repayment and undermine basic service delivery.  Policymakers and scholars have struggled to formulate meaningful restructuring options.  Up to this point, the literature has focused on federal bankruptcy law and the options available under Chapter 9.  But this resource-draining process is not the fulcrum point for any meaningful solution.  Indeed, for the vast majority of distressed municipalities, the lever of municipal recovery will not turn based on the solutions that have to date been offered.

In an article forthcoming in the 2015 William & Mary Law Review, I attempt to radically shift the municipal recovery debate by arguing that state law is the centralized point at which officials can exert the necessary amount of pressure to gain concessions from key creditor constituencies.  I propose a comprehensive system that (i) identifies pressured municipalities at a time where measured adjustments are sufficient to create sustainable viability, and (ii) shepherds distressed municipalities through a dynamic negotiation structure in an effort to capture Chapter 9’s primary benefits without the costs, inefficiencies, and constitutional quandaries.  Animating this proposal is a more nuanced understanding of the Contracts Clause that allows a municipality to explore unilateral contract modification in an effort to facilitate consensual agreements with creditor constituencies.

My proposal offers systemic rehabilitation at a time when a new approach is desperately needed.  The full version of the article is available here.

For previous posts on Municipal Bankruptcy see here and here.