Written Testimony of Samir D. Parikh Regarding Mass Restructurings and Divisive Mergers (Before the Subcommittee on Federal Courts, Oversight, Agency Action, and Federal Rights)

Abstract

The primary objectives in resolving mass tort cases should be to provide victims the largest recovery possible under the circumstances and secure that recovery on the shortest timeline. Claims arising out of a similar nucleus of facts should not receive wildly divergent recoveries – a result customarily seen when mass tort cases are resolved through jury trials across the country. Pursuit of these objectives illuminates federal bankruptcy court as the optimal resolution venue. This conclusion is the result of bankruptcy’s unique optionality and the limitations and deficiencies that characterize other claim aggregation processes.

Class aggregation under Rule 23 of the Federal Rules of Civil Procedure is arguably the most recognizable claim aggregation process in the US. But in the 1990s, the Supreme Court ruled that Rule 23’s strictures exclude the vast majority of personal injury, mass tort cases. Multi-district litigation was subsequently embraced to fill the resolution void, but the process has been forced to serve a role for which it was not designed. MDL lacks many of Rule 23’s fundamental safeguards that ensure process integrity, and victims rarely receive their “day in court” through this process. Most troubling, MDL – which has repeatedly been described as a “black hole” – can be extremely protracted and is plagued by backroom deals, the details of which remain hidden from the public. In recent years, federal bankruptcy has emerged as the optimal venue to resolve personal injury, mass tort cases. Bankruptcy allows aggregation of state and federal claims held by both current and future victims. Bankruptcy’s automatic stay halts the litigation tsunami that squanders resources that should ultimately go to victims. Parties are able to focus on a global settlement. The promise of a comprehensive resolution draws parties to the bargaining table and encourages meaningful settlement talks; ending pointless posturing and attempts to curry public favor through the media. The bankruptcy court can rapidly estimate all claims against the mass tort defendant for the purposes of formulating a plan of reorganization. Victims are able to vote on their proposed treatment, and inequitable plans can be voted down. Because there are few debtholders or other creditors typical of most chapter 11 cases, mass tort victims hold a tremendous amount leverage in designing the final resolution. Naturally, the process is not perfect, but the primary infirmities can be addressed by the bankruptcy judge overseeing the case. We don’t need new legislation or complicated statutory amendments to make the bankruptcy process work for mass tort stakeholders.

Divisive mergers are the final issue discussed below. The maneuver known as the “Texas Two-Step” – but which I refer to as “corporate mitosis” – is certainly unorthodox. However, there is nothing illegal, inequitable, or fundamentally improper about it. Divisive mergers have been undertaken for decades, and are legal in Texas, Arizona, Pennsylvania, and Delaware. Divisive mergers that seek to defraud creditors can be attacked under fraudulent transfer law, a claim that bankruptcy courts are experienced in assessing. I do not believe that a corporation that has undertaken a divisive merger prior to filing for bankruptcy should be assumed to have engaged in a bad faith filing. In my opinion, any blanket rule that denies divisive-merger entities access to federal bankruptcy court would be misguided.

Ultimately, bankruptcy offers the highest likelihood of providing victims with a meaningful recovery on an accelerated timeline. Without bankruptcy, these cases may have to be adjudicated on a case-by-case basis over the course of years or decades. Some victims may secure enormous recoveries through jury trials; others will receive nothing even though all these claims emerge from a similar nucleus of facts. This litigation option is slow, highly speculative, and resource intensive. MDL is the alternative but comes with many of these problems and adds a few more. I don’t believe either option serves victims’ best interests.

Divergent recoveries are an inveterate aspect of our jury system. However, federal bankruptcy offers mass tort victims an alternative to this inequity. Baseless speculation should be insufficient to preclude access to this superior resolution option. I applaud this subcommittee for devoting hearings to these important issues and hope to offer some insight.