Wed 07/28/2021 14:04 PM
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Relevant Documents:
Hearing Notice
Bill Text
Press Release

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At a hearing of the House Judiciary Committee Subcommittee on Antitrust, Commercial and Administrative Law on “Confronting Abuses of the Chapter 11 System” today, Chairman. Jerrold Nadler, D-N.Y., announced the introduction of the Nondebtor Release Prohibition Act of 2021, that would restrict nonconsensual nondebtor releases in chapter 11 cases. According to a press release issued by Sen. Elizabeth Warren, D-Mass., the bill is co-sponsored by Sens. Warren, Richard Durbin, D-Ill., and Richard Blumenthal, D-Conn., along with representatives Nadler and Carolyn Maloney, D-N.Y.

Much of today’s hearing focused on the nonconsensual nondebtor releases for the Sackler family in the Purdue plan, though subcommittee members and witnesses also discussed nondebtor releases in the Boy Scouts of America and USA Gymnastics cases. According to Nadler, the bill would ban nondebtor releases “in most circumstances” and adopt “strict standards” when available. Among other things, the bill would require that consent to nondebtor plan releases be given in a “signed writing” rather than deemed from failure to object to or vote against a plan, and would limit to 90 days injunctions extending the automatic stay to litigation against nondebtors.

The bill would also require the dismissal of bankruptcies filed after an entity undergoes a divisional merger under Texas or Delaware law - the so-called Texas two-step. Johnson & Johnson recently suggested that it might use this maneuver to spin off its talc tort liabilities.

In his prepared comments, Nadler lamented that the current system allows “bankruptcy grifters” such as the Sacklers to “leech off another entity’s bankruptcy” to “hide their misdeeds” and “secure ill-gotten gains.” Subcommittee chair David Cicciline, D-R.I., called the Bankruptcy Code “broken” because, among other things, it allows nondebtors guilty of the “most horrifying conduct imaginable” to hide behind an “opaque complex” of Code provisions and “complicated practices.”

Legislative reform is needed, Cicciline remarked, to prevent “wrongdoers” and “powerful, lawless corporations” from “rigging” the chapter 11 system by undermining existing “checks and balances.”

Greg Steube, R-Fla., defended the chapter 11 system, calling it the most successful insolvency regime in the world and noting that other jurisdictions have copied it.

Adam Levitin, a professor at Georgetown University Law Center, testified that much of the blame for today’s chapter 11 abuses results from debtors hand-picking friendly judges. The key to the Sacklers “getting away” with keeping billions in fraudulent transfers from Purdue, Levitin said, lies in the Purdue debtors’ ability to “hand pick the judge” for their case - though Levitin declined to name Judge Robert Drain specifically. The debtors knew Judge Drain “was likely to rule in [their] favor on all the key issues,” Levitin said, and “so far he has not disappointed.”

Levitin said he expects Judge Drain to approve the Sackler nondebtor releases and that there will be no effective appellate review due to equitable mootness.

Connecticut Attorney General William Tong took direct aim at Judge Drain. When asked by Rep. Cliff Bentz, R-Ore., to explain why the Sacklers agreed to contribute “so little” to the Purdue global settlement, Tong answered that from his experience “at the negotiating table” the Sacklers knew there was a “very strong possibility” they would get nonconsensual nondebtor releases “in Judge Drain’s courtroom.” Opioid plaintiffs settled with the Sacklers, Tong added, because they knew there was a “very real risk” Judge Drain “would go beyond the scope of the bankruptcy” and “consider the Sacklers’ interests when they’re not debtors.”

Rep. Mondaire Jones, D-N.Y., said he “felt obligated,” as the representative from White Plains, to “apologize for the behavior of Judge Drain.” In his experience, Jones said, Judge Drain “is overly solicitous of wrongdoing corporations.”

Levitin lamented that competition for large cases among a “handful” of bankruptcy judges has led to a “race to the bottom.” Debtors “don’t want a judge who’s a great judge,” Levitin testified, but a “judge who’s great for them,” and debtors’ counsel feel they have a duty “to pick the judge who is best” for the client. Debtors’ counsel selects a judge, Levitin said, because they have a “belief that judge is going to favor them on every key issue,” and due to equitable mootness, they know there is “not going to be effective review.”

This gives debtors “free rein to engage in aggressive restructuring techniques,” Levitin concluded. Debtors know the chosen bankruptcy judge “isn’t going to stand in the way.”

Rep. Jamie Raskin, D-Md., asked Levitin why bankruptcy judges compete for large chapter 11 cases. Levitin speculated that the “handful” of competitive judges may “like being at the center of attention with a big matter,” as they “come from large chapter 11 practices themselves.” These judges would rather deal with mega-case chapter 11 lawyers, Levitin suggested.

These judges send out “signals” to major debtor firms “that if they file in their court” the debtors “will get favorable treatment,” Levitin explained. As an example, Levitin pointed to the complex case panel of Judge David Jones and Judge Marvin Isgur in Houston, which takes all large chapter 11 cases filed there. An advisory panel composed of the “heads of major debtor-side practices,” Levitin continued, signals that the two Houston judges are “here to listen” to debtors’ counsel, and “the court is ready for you.”

One judge in Houston, Levitin pointed out, has remarked that the court should be more “customer friendly.” “I didn’t know bankruptcy courts had customers,” Levitin remarked.

When Raskin asked Levitin how to stop the practice of judge shopping, Levitin proposed a federal rule or new legislation requiring that districts assign cases randomly, without regard for geographic divisions within the district or “complex case panels.”

Douglas Baird, professor at the University of Chicago Law School, warned the subcommittee about the potential unintended consequences of sweeping bankruptcy reform. Baird noted that in many cases, with “able counsel” and a “fair judge,” tort victims can recover more compensation through the use of nondebtor releases. Baird also cautioned that a blanket prohibition on such releases may lead to liquidation of some businesses instead of reorganization in addition to a lower recovery for tort victims, but said that “may be a price worth paying.”

With respect to venue reform, Baird indicated that he “agrees absolutely” with Levitin and Tong that the current system requires reform. “Having three judges decide this many cases is not a sign of a system working effectively.”

David Skeel, professor at the University of Pennsylvania Law School and member of the Financial Oversight and Management Board for Puerto Rico, trumpeted the protections for creditors under the Bankruptcy Code and the “enormous amount of transparency” in chapter 11 pleadings, in response to a question from Steube. Legislation that limits bankruptcy judges’ discretion could leave them with their “hands tied” when “new things arise,” Skeel said, while conceding that “sometimes hands being tied is a good thing.”

In addition to Levitin, Tong, Baird and Skeel, the subcommittee also heard testimony from Tasha Schwikert Moser, a former Olympic gymnast and attorney who was abused by former USA Gymnastics team doctor Larry Nassar, and Alexis Pleus, whose son died of a heroin overdose after becoming addicted to Oxycontin. Both witnesses said they felt the chapter 11 system was being abused to deny them of their right to bring their claims against the Sacklers and the U.S. Olympic Committee, respectively.

“I am enraged,” Schwikert Moser said, that her claims against the nondebtor U.S. Olympic Committee might be released in a USA Gymnastics plan without her consent via a “loophole.”

“Hopefully there are people in the bankruptcy system that are listening today,” Rep. Ken Buck, R-Colo., told the witnesses.
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