Episode Transcript
[00:00:00] Speaker A: Imagine a justice system built on rigorous evidence, not gut instincts or educated guesses about what works and what doesn't.
More people could access the civil justice they deserve.
The criminal justice system could be smaller, more effective, and more humane.
The Access to Justice Lab here at Harvard Law School is producing that needed evidence. And this podcast is about the challenge of transforming law into an evidence based field.
I'm your host, Jim Greiner and this is proof Over Precedent.
This week, we're bringing you a student voice.
[00:00:37] Speaker B: Bankruptcy law is meant to offer the honest but unfortunate debtor a fresh start.
But what happens when it becomes a tool used by corporations to manage or avoid mass tort liability?
In 2021, Johnson and Johnson faced tens of thousands of lawsuits alleging that its baby powder products were contaminated with asbestos and caused ovarian cancer.
Several juries awarded plaintiffs billions in damages. With more than 38,000 claims still pending, the company turned to a controversial restructuring tactic known as, the Texas Two Step. This maneuver effectively paused all tort litigation, delaying plaintiffs access to courts for years.
So what is a Texas Two Step bankruptcy? What Access to justice problems does this maneuver present? And how should the legal system respond?
My name is Jacqueline lin. I'm a 1L student in Professor Griner's Access the Justice Lab, and we are going to take a deep dive into these questions on today's episode.
We're incredibly honored to have Professor Melissa Jacoby with us today. Professor Jacoby is a leading scholar of commercial and bankruptcy law.
She is the author of Unjust Debts and has published in numerous outlets including
[00:01:54] Speaker C: the New York Times, the Yale Law
[00:01:56] Speaker B: Journal, and the American Bankruptcy Law Journal. Professor Jacoby has been elected to the
[00:02:01] Speaker C: American Law Institute and was named the
[00:02:03] Speaker B: 2016 Robert N. Zimmen Scholar by the American Bankruptcy Institute. She has also twice been appointed by Chief Justice John Roberts to assist with federal judicial education.
After more than two decades on the faculty at the University of North Carolina at Chapel Hill, she is currently working on her next book, an educational initiative, the Gilmore Project.
Welcome, Professor. It's so good to see you.
[00:02:28] Speaker D: It's great to talk to you, Professor.
[00:02:30] Speaker C: Could you start us off by briefly explaining to our listeners who may not be familiar with law or bankruptcy law at all, what is a Texas Two Step Bankruptcy?
[00:02:39] Speaker D: Oh, goodness. I think we have to back up a little bit to say what even is a bankruptcy, because people think of all different things when they think about bankruptcy. So I think it's first important to say that bankruptcy is a federal law procedure and it's a really big legal deal, especially for people who are learning about our legal system, which presumably is one of the audiences for this podcast to say that it is one of the things that the American Constitution says that Congress can write laws about.
And Congress has written laws about bankruptcy. And they say that if a person, and we can talk about, whether we're talking about a human person or a business association person, has too many debts, under some circumstances they can get relief from those debts. They can halt otherwise legal action to enforce those debts and sometimes halt them permanently.
The other key thing to know is what counts as a debt in bankruptcy land. Because when I hear about a debt, I would typically think I borrowed money, it needs to be paid back. Credit card bill, a mortgage, loan for, to buy a house.
But in bankruptcy, as Congress wrote the law, a debt is almost anything for which you have a legal liability, sometimes even an equitable responsibility, which the law students will know sometimes means that something you are obliged to do as opposed to pay money for.
And so torts harmoning people, whether on an individual basis or a widespread basis, are debts in bankruptcy.
So bankruptcy raises access to justice issues all over the place. On the one hand, how accessible is the system for financially distressed individuals and families? But on the other hand, what you've been writing about, Jacqueline, is the impact of bankruptcy of an A company on people that say they've been very hurt by that company.
So that's just generally a very broad overview. This name, Texas Two Step, which I don't know what you thought it was originally, I thought it was a dance, and I guess it is a dance. But it was adopted to say for. For corporations to do it. A even more creative way to say that for corporations to get restructured in bankruptcy, there are a lot of checks and balances because it's a really big deal for a company to get to stay alive without honoring up all of its legal obligations.
So there are a lot of different protections put in place to bring all the parties to the negotiating table and voting rights and all sorts of things. A company usually has an incentive to get through that process as quickly as they can. And that means to concede to some things that their creditors might want.
In a Texas Two Step bankruptcy, what's happened is that basically the company has put only its liabilities to people who have been hurt by allegedly by a product in a separate business association, in a separate limited liability company or corporation, or it doesn't trust. It doesn't really matter what the structure is, it's just separate. So the business, the operating business can go on as usual and pay their give dividends to their shareholders, continue to making profits, continue paying all of their other kind of creditors in full.
It's only the people who say they've been hurt, whether it's of baby powder or asbestos and the like, that are stuck, if you will, in the bankruptcy. And that just changes a lot about how the case will work.
[00:06:52] Speaker C: Yeah, I think something you tease out there is that mass tort's liabilities have frequently been involved with bankruptcy or intertwined with bankruptcy. We resolve these liabilities through bankruptcy all the time. But the Texas Two Step is a uniquely creative way in which bankruptcy intertwines with mass tort liability. So I was wondering if you could tease out for us a little bit more why it uniquely disadvantages or harms mass tort litigants in this more creative iteration.
What about the Texas Two Step? Bankruptcy is uniquely concerning compared to our usual way of resolving tort liabilities and bankruptcy?
[00:07:31] Speaker D: I will give you the shortest possible answer to that, but also give listeners two different other places that they can look, maybe three. One is a New York Times guest essay I wrote that the paper labeled the Moral Limits of Bankruptcy Law, where I tried in about 1400 words to encapsulate the problem, which was a generous amount of words for guest essays, especially one about bankruptcy. So I appreciate, appreciate that. I've written a book, as you mentioned, Jacqueline, Unjust Debts, How Our Bankruptcy System Makes America More Unequal. And I dedicated not just one chapter, but two to unpacking the history of mass tort bankruptcy and then also this Texas Two Step addition.
So I will say that I have concerns about how mass tort bankruptcy works in general and part of the issue. And I think this is important to remember when we listen to very influential lawyers and other professionals who can make us believe in almost anything. They can make us believe Santa Claus exists because they're very persuasive and they'll tell us about prior cases that they were resounding successes, and they'll tell us how bright the future looks for the deal that they've struck and how it's going to be very beneficial for everyone, but especially for law students. You've gotten this far often knowing that you're supposed to question.
And one thing I ask in my work is can you show us the receipts, show us what actually happens in these cases. And so the first thing we see is that the promises made for how people will be treated, both how their claims are evaluated when they say they've been hurt, but also how they're going to be paid and whether they are actually paid.
I think that these injuries are about a lot more than money and these cases are about a lot more money. But if you're going to say that they're all about the money, then show us the receipts.
And so what I try to do in accessible language and unjust debts is walk through that. What's promised is often much more rosy than what's delivered, including the way that the people who have been injured are treated or whether they perceive the system as fair.
All of those kinds of concerns ramp up in a two step bankruptcy because there's enormous pressure for claimants and their lawyers to strike a deal, to say, let's just agree to a pot of money and work out how we're going to divide it later.
And so let me just give you one example of why that's a problem.
It is rare that everybody's injuries are exactly the same. It is rare that everybody has equally strong proof of their harm or that company contributed to their harm.
We have a tort system as imperfect as it is in part to tease out those issues in Texas. Two step bankruptcies ramping up. What's already happening in mass tort bankruptcies, everybody's given the same leverage, the same voice, everyone's given the same vote. So people who never were injured enough to even file a lawsuit in another court, or who would not be able to prove any harm or have injuries of a completely different nature than been scientifically proven to be connected with the product, they're given it as much, say, and as much weight as people who have been working on their evidence for years and have really strong cases, and some of which have already gone to trial and received a judgment or were teed up for trial, had survived motions to dismiss.
And so it is really dampening the leverage of people who deserve a day in court, even if it isn't a full blown trial, but deserve to have their claims taken more seriously in a legal system, are being drowned out by large numbers of claims that haven't been vetted at all. And the Texas two step structure increases the likelihood that happens.
[00:11:59] Speaker C: Yeah, that's a really great synopsis and obviously encourage everybody to go to the
[00:12:03] Speaker B: supplementary sources as well.
[00:12:05] Speaker C: So the question that comes to my mind upon hearing this is about the role of judges and bankruptcy judges, because the pot of money, how much it is to compensate all the tort victims, is subject to the judge's approval and they oversee this entire process. So I was very curious about why judges are approving pots of money that may not be sufficient or even letting Texas two step bankruptcies proceed. What are kind of the legal foundations and reasons why we see this phenomenon?
[00:12:37] Speaker D: So the first thing I want to say is what a phenomenal bankruptcy court system America has. We've got merit selected federal judges for 14 terms. They're part of federal district courts. And one of the things I say early in unjust debts is that I admire this court greatly. That doesn't mean I always agree with every individual decision decision. But that would be preposterous that my analysis is not.
Even though sometimes I wish a judge would come out differently on a certain issue. It's not an indictment of the bankruptcy courts really at all. There are larger forces at work that need to be discussed. So first of all, I think appellate courts and the Supreme Court have to play a role here and what guidance they give. Bankruptcy courts are a trial court. So there are a lot of questions that are unanswered. Even though the Bankruptcy Code is extremely long and extremely dense, a lot of issues in mass tort bankruptcy have gone off script. They are doing a completely different thing. And the Supreme Court has not ruled on almost any of that. There is a pending certiorary petition at the time that you and I are having this conversation coming out of the best wall bankruptcy that is is a Texas two step case. I've also heard rumors that have been reported in the press that that's a Georgia Pacific company that was spun off, that they're planning to abandon it, that their bankruptcy and start all over again. That case has been pending for something like nine years. But to get to more details about why do judges approve these things? First of all, they often have not. So we've seen that the third Circuit Court of Appeals did dismiss Johnson and Johnson's attempt twice. They then fled to a judge or a court in Texas who did dismiss their case. Although in the meantime that was a lot more claimants who were not having their trials. They got a lot of JJ got a lot of opportunities to show why what they were doing met the requirements of bankruptcy law. And ultimately the court held that what they were trying to do did not meet the requirements.
But that was many years in the making if we count all those bankruptcies together.
But I've gotten in the weeds here. So let's pull all the way back, especially thinking about law students, what you learn about American law.
We have in general an adversarial system of courts in America, not an inquisitorial system. And the adversarial system means that the court there's a lot the court doesn't know that goes on behind the scenes. They only know what's presented to them in formal papers and in court proceedings. That's the idea in a lot of these cases.
The court is making a decision based on the best available information, often because parties have settled and an alternative valuation for the pot of money or the amount of claims has never come to their attention. So I tell the story of the Boy Scout bankruptcy in unjust debts in a fair amount of detail to try to show why there's the the judge made the choice based on the best available information, saying that the Boy Scouts were promising to pay 100 cents on the dollar of these claims when very quickly thereafter, it became clear that was not going to happen. The trustee overseeing that process said very early that was very unlikely. And they're really talking about a couple cents on the dollar at this point. And the process has to be deliberative and has to be careful.
This is a more structural issue. It also goes to how big law firms might be incentivized to push the envelope and be very aggressive with the law. We have the adversarial system, which I think in most ways is very good. But it does have these effects, one of which is if we have a problem with what's going on, the answer isn't just to wag our fingers at judges and say try harder. That that can't resolve us 100%.
[00:16:59] Speaker C: I totally agree. And so I guess my next question is, so where should we look instead? Because I know courts have come out opposite ways. Third Circuit, fourth Circuit. There is a split and there is a possibility of judicial review. But there are also some legislative efforts, though a little bit stagnant at times, some bipartisan efforts where people have proposed reforms, whether it's the Ending Corporate Bankruptcy Abuse act or more recently the Bankruptcy Venue Reform act to target venue shopping specifically that enables the Texas two Step. Where do you think we should look to in terms of the best institutional stakeholder or channel to tackle this problem of Texas two Step bankruptcies?
[00:17:43] Speaker D: As someone who does believe strongly in separation of powers and in federalism in some real way, I think the answer doesn't completely lie in only one place. I have testified a couple times in Congress about some of the endeavors that you've mentioned. I do think the venue laws of the United States for bankruptcy courts are very different than the venue laws for other kinds of federal courts, and that the difference cannot really be justified. So I do think that there should be some changes there, but going broader I think people have lost sight that bankruptcy is an exception to the general rule that has to be construed very narrowly.
One thing that you and I, our conversation hasn't fleshed out, but is very much in the other things that I've written about, is the very idea of who's entitled to use these extraordinary tools of bankruptcy. You're supposed to have financial distress.
And I'm telling you that the individuals who file for bankruptcy, financially distressed families and individuals who do everything they possibly can to avoid going bankrupt and still are put through the ringer to prove that they're honest and unfortunate and have a lot of paperwork to file. And it's a very expensive process for people who really have no money. That's the vast majority of bankruptcy filers on the one hand. And then on the other hand, is there any actually a circuit split on whether you need to be in financial trouble to file for bankruptcy for big corporations? That's wild. So one of the things I try to make people or encourage people to think about, especially law students, is to think across different legal categories of how individuals are treated relative to big enterprises and can the differences be justified. So I would like to get more attention to that, how to justify that treatment. I would like bankruptcy power to be narrow, to be more narrowly construed, because the way it's being used now, it is overriding so much state law, so many state procedures, which are really for those who learn tort law, who learn contract law and the like. That's where the action is supposed to be.
And bankruptcy is Texas. Two step cases really show that there are no, if to the extent successful, that it's kind of eaten up, the rest of the justice system has become basically an alternative justice system, and that that was never what it was meant to be.
So I'm afraid I don't have a neat answer for you. But I think that the optimistic way to think about that is there are a lot of ways to approach the problem that could help, at least on the margins. But one way to think about it, especially for people just starting out, is to really always be reflecting whether laws have bias between individuals and corporations. That's not a kind of bias that is constitutionally recognized, but it's also a kind that isn't controversial. In the same way there's other kinds of questions about bias at this time.
[00:20:55] Speaker C: Yeah, that's a super interesting idea and one that really was at the back of my mind as I was doing this research.
So I think we could.
There is something interesting about how bankruptcy Law, but also other laws are governing both individuals and corporate entities.
And for bankruptcy specifically, perhaps it is even more stark that we have chapters where it is about individual debtors, and we literally have different chapters for corporate debtors. And so there seems to be reasons to treat them differently based on these different situations, but also there are reasons to ensure that they're treated the same. So we're not favoring corporate entities. So I guess on this broad level, is there. Do you have any thoughts about how we could make the Bankruptcy Code something that takes into account these nuances in different situations of individuals versus corporate entities and yet ensure it is equitable and fair and not something that allows corporations to carve out exceptions for themselves? On the broadest level for the Bankruptcy Code, how should we go about thinking about the fact that it encapsulates both of these kinds of actors?
[00:22:01] Speaker D: We could start by, first of all, there's nothing that says that the law has to be identical for all persons, but there should be a reason that they're different. So I think that even just approaching it that way would get us a little bit down the road. When people talk about why corporate bankruptcy is the way it is, they will often use economic arguments about maximizing value and that. So we need to be more generous with corporations because that will maximize value. We don't know that's true. There is a.
It's a mixed picture about whether that's true generally. It's also a mixed picture about whether empirically it's true in each individual case it's uttered.
For those of you who spend any time in bankruptcy court, you will maybe smile at this. The number of times maximizing value comes up in any given court hearing or conversation will be a high number. And it like saying, have a nice day or excuse me, and I don't mean to belittle it. It is definitely a goal of bankruptcy to maximize value, but saying it all the time doesn't make it true.
So when we talk about personal bankruptcy, sometimes people lead with economic arguments. So, for example, to say if people are allowed to abuse the system, it will raise the cost of credit for other people. Now that is theoretically hard to refute empirically has not always been quite the case. But more often personal bankruptcy is looked at in a moralistic way. Surely you should have tried harder. Wait, why did you take your kids for ice cream all those times last year? I'm exaggerating a little bit, but there's kinds of things come up of mis that that personal financial decisions get questioned in a way that in big business bankruptcies do not even when they've made very very big mistakes. It's much more forward looking. Personal bankruptcy is way more do you deserve this? And that's already odd. So let me just give you one more example to tie up this response.
Individuals cannot get debt relief for debts incurred for willful and malicious injury. I think that's a sound rule. I think that the way it's implemented can sometimes be tricky. But bankruptcy is basically for contract debts. That's where it functions best. And it does concern me that the idea that someone could engage in a willful and malicious injury and that the bankruptcy system somehow resolves that.
But corporations don't have that restriction. Corporations.
So let's say I don't know for sure if this could be proven with respect to the businesses that have done the Texas two step as a way to resolve issues in bankruptcy. But what if there's evidence that they intentionally disregarded the severe harms of a product for years and years and would that be enough? Or we'd have to look at what the standard is. But there are cases in which corporations certainly would could be susceptible to that standard. And yet it doesn't apply at all to big businesses. So is that the message we want to send to corporate America or America generally? Law serves an expressive function and I'm very. And it also a deterrent function. And this goes at odds with tort law. What tort law is trying to do. So another long answer to a very good question.
[00:25:31] Speaker C: No, that is super eye opening. I didn't know about this distinction and I think that teases out a really interesting point that I think is underlying this entire conversation which is it's hard to solve these problems. There are a lot of puzzle pieces. But somewhere to start is how we think about bankruptcy in general. That bankruptcy carries a lot of moral stigma and sociological weight when we discuss it in reference to an individual person as a state. But maybe that doesn't always transfer the same way when we're talking about intangible corporate entities. And where do these disparities in legal rules come from? Maybe there is roots in how we consider it in the socio cultural political context and that's always somewhere to start with these discussions. So this has been super eye opening and I really encourage all of our listeners to go give it a read in Professor Jacoby's Unjust Debts. I think that this is a super interesting and important topic and something that we should all reflect further about and think more about. So thank you so much for your
[00:26:33] Speaker D: time it was great to talk to you, Jacqueline.
[00:26:36] Speaker C: Thank you so much.
[00:26:37] Speaker A: Proof Over Precedent is a production of the Access to Justice Lab at Harvard Law School.
Views expressed in student podcasts are not necessarily those of the A J Lab.
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