Scarlet-Lettered Bankruptcy: A Public Benefit Proposal for Mass Tort Villains

117 Northwestern University Law Review (2022 Forthcoming)

45 Pages Posted: 26 Jan 2022 Last revised: 22 Apr 2022

See all articles by Samir D. Parikh

Samir D. Parikh

Lewis & Clark Law School; Fulbright Schuman Scholar; Bloomberg Law; Fulbright Commission

Date Written: January 10, 2022

Abstract

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 American, and USA Gymnastics – introduce new complexities to customary chapter 11 dynamics. Many mass tort defendants engage in malfeasance that inflicts widescale harm. These debtors fuel public scorn and earn a scarlet letter that can destroy value for 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 tortious conduct 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 there is 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.

Keywords: Mass Torts, Aggregate Litigation, Bankruptcy, Financial Restructuring, Civil Procedure, Purdue Pharma, Public Benefit Company, Johnson & Johnson, Corporate Law

Suggested Citation

Parikh, Samir D., Scarlet-Lettered Bankruptcy: A Public Benefit Proposal for Mass Tort Villains (January 10, 2022). 117 Northwestern University Law Review (2022 Forthcoming), Available at SSRN: https://ssrn.com/abstract=4005503 or http://dx.doi.org/10.2139/ssrn.4005503

Samir D. Parikh (Contact Author)

Lewis & Clark Law School ( email )

10015 S.W. Terwilliger Blvd.
Portland, OR 97219
United States

Fulbright Schuman Scholar ( email )

United States

Bloomberg Law ( email )

New York
New York, NY
United States

Fulbright Commission ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
176
Abstract Views
537
rank
233,764
PlumX Metrics