Bankruptcy Grifters.

• Author: Simon, Lindsey D.

ARTICLE CONTENTS INTRODUCTION 11S7 1. THE CHAPTER 11 ENDGAME FOR MASS-TORT LITIGATION 1161 A. Benefits of Bankruptcy for Mass-Litigation Defendants 1162 1. The Allure and Expense of Bankruptcy 1162 2. Elements of Mass-Tort Cases 1164 B. Channeling Injunctions and Nondebtor Releases 1166 C. The Origin and Expansion of Nondebtor Relief 1171 II. CHANNEL AND RELEASE IN CHAPTER 11: THE TAKATA BANKRUPTCY 1176 A. Procedural Protections 1179 B. Substantive Outcomes 1181 C. Other Considerations 1182 III. THE BREWING STORM OF OPIOID AND SEX-ABUSE BANKRUPTCIES 1183 A. Bankruptcies of the Opioid Crisis 1186 l. Purdue Pharma 1188 2. Insys Therapeutics 1191 3. Mallinckrodt 1192 B. Bankruptcies Driven by Sex-Abuse Liability 1194 1. USA Gymnastics 1195 2. Boy Scouts of America 1197 3. Diocese Cases 1200 C. Trends of the New-Era Bankruptcy Grifter 1202 IV. ENDING THE GRIFT 1205 A. Procedural Checks in the Bankruptcy Process 1207 1. Mandatory Disclosures 1207 2. Discovery Mechanisms 1209 3. Procedural Protections for Channeled Claims 1210 B. Gatekeeping for Grifters 1211 1. The "Best Interests" Test for Bankruptcy Grifters 1212 2. The Section 524(g) Mandatory-Contribution Analysis 1214 CONCLUSION 1215 INTRODUCTION

In 2017, Olympic gold medalist McKayla Maroney (1) sued the United States Olympic and Paralympic Committee (USOPC) in connection with the horrific Larry Nassar sex-abuse scandal. (2) Today, she is trapped in the matrix of bankruptcy because USOPC is a bankruptcy grifter--a parasite that embedded itself within the Chapter 11 case of USA Gymnastics (USAG). (3) Although USOPC is a solvent entity with hundreds of millions of dollars of assets, (4) Ms. Maroney and other abuse claimants now have no choice but to pursue their claims in bankruptcy court. (5) How is this possible? USOPC did not file for bankruptcy, but by latching itself onto the USAG bankruptcy, it now seeks to receive the benefits of a Chapter 11 reorganization without incurring any of the associated costs. (6) USOPC is the prototypical bankruptcy grifter. (7)

Bankruptcy grifters like USOPC are not created by the Bankruptcy Code. Instead, it is judges, reviewing difficult restructurings under dire circumstances, who grant them access to the bankruptcy system. Case by case, exception by exception, bankruptcy grifters have infiltrated the Chapter 11 process. Over the past few years, mass litigation arising out of the opioid crisis--including the bankruptcy cases of opioid manufacturers Purdue Pharma and Mallinckrodt--has shifted from state and federal systems to bankruptcy courts. The same has occurred in sex-abuse cases, including those involving the Boy Scouts of America (BSA), USAG, and multiple Catholic dioceses. In each of these examples, bankruptcy grifters seek to join the debtor in resolving mass-tort litigation through Chapter n's procedures without filing for bankruptcy themselves.

This is an appealing approach for many stakeholders because it allows muchneeded resources to reach victims through a large settlement scheme. The outcome of a bankruptcy case can bind absent parties, a significant feature that sets it apart from nearly all forms of civil litigation. Mass-tort defendants, eager for the binding finality of a confirmed Chapter 11 plan, are often willing to settle in bankruptcy for terms that would not be possible in other fora. The only problem is that most mass-tort defendants do not want--or do not qualify--to file for bankruptcy. Savvy defendants like the Sacklers, (8) Honda, (9) Wal-Mart, (10) and USOPC (11) have found a way to get this relief without filing Chapter 11, offering money to claimants and threatening to implode settlements unless they receive injunctions and releases in bankruptcy court. Judges, believing in the precarious nature of negotiations and the value of global resolution, allow nondebtors to absorb benefits that Congress designed for debtors only. Bankruptcy grifters are like a Trojan horse in the bankruptcy system, undermining the integrity of the bankruptcy process at the expense of claimants who will lose procedural protections and rights.

Bankruptcy operates in an alternate universe from most civil litigation. Each case complies with the basic parameters of the Bankruptcy Code, but it is bankruptcy courts' common-law development of creative mechanisms that drives most outcomes. This laboratory approach stems from stark realities. In bankruptcy, companies are at risk, valuable assets are deteriorating, and jobs hang in the balance. Within our legal system, few resolution structures exist to imagine and carry out competing stakeholders' intent when faced with a grim and unanticipated financial reality. (12) Bankruptcy imposes certainty and order among categories of creditors, provides repose from litigation and business chaos during the Chapter n case, and restricts the debtor from improperly managing its threatened affairs. The Chapter 11 process is open and available for distress of all forms, but its rigor and adaptability are derived from a laser focus on maximizing value and preserving the estate.

Channeling injunctions and releases are the primary benefit that bankruptcy grifters seek in Chapter n. When a bankruptcy court approves a channeling injunction as part of a plan of reorganization, it creates a dedicated quasilitigation path to resolve claims against the debtor (and potentially also against nondebtors) and releases the debtor from further liability. The channeling injunction usually funnels claimants into a dispute-resolution trust system created by the debtor, complete with debtor-created evidentiary standards, appeals processes, claims-payment regimes, and arbiter selections. These resolution systems, on average, do not have the procedural protections that accompany Article III review in a class action or multidistrict litigation (MDL) proceeding. From a claimant's perspective, channeling injunctions may extinguish their litigation against a bankruptcy grifter, force them to recover from a limited pot of money, and be approved on a timeline that does not allow the claimant to conduct sufficient discovery or receive a voice in the process. Procedural concerns abound in aggregate litigation. If left unchecked, bankruptcy can serve as an accelerant for the gravest due-process threats facing mass-tort victims.

In Part I, this Article identifies the litigation benefit that bankruptcy grifters may receive in bankruptcy through use of the channeling injunction. It begins by tracing and discussing the origin of channeling injunctions in asbestos cases. Faced with asbestos debtors' staggering liability to current and future victims, judges evaluating asbestos bankruptcies approved a channeling device to preserve funding for victims experiencing latent harm, collect and equitably distribute insurance-policy proceeds and other contributions in a trust structure, and allow companies to successfully reorganize and move on from asbestos liability. Congress codified channeling injunctions for asbestos cases in [section] 524(g) of the Bankruptcy Code, which sets out specific criteria for nondebtors seeking the benefits of the device. (13)

Next, this Article analyzes cases where nondebtor defendants have appropriated channeling injunctions to resolve other mass-tort liability via the bankruptcy court's equitable power under [section] 105. (14) Though Congress never contemplated channeling injunctions outside of the asbestos context, courts have approved the device for different categories of nondebtors in many varieties of mass-tort cases. What started primarily as a tool for the debtor's insurers to compensate asbestos victims has expanded in recent cases to include settlement-hungry codefendants who have only tangential legal connections to the debtor's estate. Willingness to cut a large check to claimants cannot alone be the price of admission to Chapter 11's benefits. Part II explores the Takata case to show how channeling injunctions and nondebtor releases can be used to resolve a mass-tort bankruptcy. By collecting and evaluating mass-tort bankruptcies arising out of the opioid crisis and sex-abuse scandals, Part III of this Article traces the increase of bankruptcy grifters seeking relief in Chapter 11. It also identifies core shortcomings that appear in mass-tort bankruptcies and observes the negative impact that nondebtor channeling injunctions may have on mass-tort claimants.

In doing so, this Article departs from long-held views in existing scholarship about nondebtor relief by demanding additional disclosure and scrutiny of bankruptcy grifters. Debates over whether bankruptcy courts can release nondebtors under the Code, the Constitution, or other sources of power remain important, but the current state of play presupposes and expands that authority. (15) Despite an ongoing circuit split, bankruptcy courts in some jurisdictions continue to provide such relief, and have done so for three decades without interference from Congress or the Supreme Court. (16)

This Article's most important contribution is articulating when and how courts should grant relief to bankruptcy grifters, not whether they have authority to do so. In Part IV, this Article provides a framework to bankruptcy courts that protects due process and preserves procedural justice when nondebtor involvement is necessary for an effective reorganization by proposing a number of potential statutory and judicial solutions to increase oversight over bankruptcy grifters' use of channeling injunctions and releases. These measures, including increased disclosure and discovery obligations and minimal substantive protections for channeled claims, serve two purposes. First, they give all stakeholders better information about whether the nondebtor's involvement and contribution are sufficient. If an entity wants to adopt the debtor's ability to channel and release claims, it should comply with certain of the core disclosure obligations...